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ARTICLE

The Failures of Private Enterprise

SEPTEMBER 01, 1963 by MELVIN D. BARGER

Mr. Barger is a public relations representative in Jackson, Michigan.

The fantastic successes of the American free enterprise system and the dismal failures of social­ism in the USSR, Red China, and elsewhere, should be familiar facts to anybody who reads. And it is probably the glittering productiv­ity of the American business sys­tem that forces its domestic enemies to attempt their changes, not by openly advocating social­ism, but by declaring themselves to be in favor of "preserving com­petition," "saving capitalism," or "protecting small business." Scarcely any Americans except a few splinter groups of eccentrics call themselves "socialists," for "socialism" won’t sell under its own brand name. Free enterprise has been so successful that even its opposite has to be offered as a form of free enterprise!

Yet, there are thousands of business failures every year in the United States, to say nothing of costly mistakes made by companies which nonetheless manage to stay solvent. All of these failures are costly also in terms of human anguish. Nobody likes to talk about them; they are skeletons in the closet of American business. This is regrettable, for the very failures of private enterprise are a powerful argument in favor of maintaining as much freedom, as possible. Failure has its rightful function in the free market place, and we ought never to suppose for a moment that failure is completely bad. It has some important uses which ought to be examined and talked about.

The very failures of private enterprise are a powerful argument in favor of maintaining as much freedom as possible.

Three Case Studies

Here are three actual business failures that will serve as cases in point:

• Six years ago a giant auto­mobile company risked over $200 million in the design, production, and promotion of a new car. In a short time it had to be taken off the market, leaving only an as­sortment of jokes and a badly dis­illusioned group of dealers;

• A small Michigan firm with a seasonal product diversified in­to the school seating business, which appeared extremely attrac­tive and profitable during the early planning stages. Powerful competition and other forces fi­nally caused them to liquidate the project, at a heavy cost;

• An electronics firm built a special plant for the production of gears under a government con­tract. Production costs in this un­familiar business drove them to the wall, and only a fortunate sale of the plant and machinery saved the company from immediate in­solvency.

Now these were personal trage­dies for the persons directly in­volved. Investors suffered through losses in savings, suppliers were deprived of valuable customers, employees lost jobs, and executives were demoted or forced to resign. In view of the "wear and tear" that failure imposes on human feelings, it is tempting to demand relief measures of some kind. The dealers who risked their savings on the new car had nothing to do with the adverse market condi­tions that caused it to fail. The employees who were laid off be­cause their company failed to make good in the school seating business were acting in good faith; they probably did their own work efficiently and well. And the small Midwestern community that had such high hopes for the elec­tronics firm’s gear business did not really deserve the blow that came when the plant closed. In all of these cases, the free market seemed to deal brutally with some rather innocent and decent peo­ple.

No Federal Aid: They Found Their Own Answers

It so happens that in the three cases cited, little provision was made to soften the impact of fail­ure. These were industries that did not have some kind of a pipe­line into public funds, so the business managers had to "eat their own mistakes." Except for unemployment payments to laid-off employees, everybody involved had to take the consequences of failure. And the result, in each case, was that the managers took decisive and energetic steps to liquidate the failing operation as rapidly as possible. They had to, in order to avoid disaster.

There was a happy sequel to each failure. The automobile com­pany went on to enjoy some unex­pected sales successes with a sports-type car and the soon-to­-appear compacts. It was able to use many of the production facili­ties that had been assigned to the defunct model. The company that failed in the school seating busi­ness applied its energies more de­terminedly than ever in its own line, grateful that they had with­drawn from the ill-advised seat­ing venture before losses became unendurably heavy. And the plant vacated by the unhappy electron­ics firm was purchased by a grow­ing, well-financed company that has since expanded the facility and tripled employment.

Hence, it should be clear that although failure was undesirable, and resulted from somebody’s mis­taken judgment, the free market put a "stop loss" on it as quickly as possible, thus halting further drains on scarce capital and other resources. Market freedom is, in fact, practically indispensable in the handling of a business failure. Business managers have to be able to take action without delay, and in some cases the losses might be so great that any postpone­ment at all will be fatal. There is also the chance that corrective measures might save the situa­tion; here again, the manager needs the freedom to act promptly. A third reason, one that is often important to the workers and the community where the business is located, is that decisive action may eventually transfer the plant and equipment to more capable hands.

None of this should be inter­preted to mean that failure is be­ing glorified or is something par­ticularly characteristic of the free enterprise system. It is only to say that the free market place has some built-in methods of dealing with failure that all other systems lack. Under any other system, failure continues to perpetuate it­self, with hidden but nevertheless real losses to the entire com­munity.

Controlled Failures

Now let us turn to the controlled market place and see what hap­pens when failure occurs. Con­trolled businesses can be either those that are directly owned by the government, such as the Post Office, or those privately owned but regulated by a government agency. In either case, the "fail­ure" mechanism is not allowed to perform its proper role. Failure happens, but it is "remedied" by doses of subsidy or by regulation that thwarts the called-for liquidation of a questionable operation. As more and more legislation is passed giving the government ad­ditional controls over the econ­omy, it also becomes increasingly difficult to deal wisely with failure.

We are sadly familiar with the methods of handling failure in government-owned enterprises. The postal deficit is something that seems to get aired annually, and as all of us know, Congress always finds the funds to make it up. It is common knowledge that the Post Office has hundreds of operations around the country that probably fail to pay their own way, and that the rates for the various classes of mail have been decided by political considerations rather than economic ones. And it is politically impossible for Con­gress to make the hard decisions that the market place makes auto­matically for the privately-owned firm. Thus, rather than shut down certain services that are losing huge sums of money, the Post Office department allows the pub­lic to fool itself by paying through taxes for the services it does not pay for directly in post­age. Some mail users also get huge benefits that everybody pays for, since not all people use the mails equally.

Were this same principle ap­plied to every commodity and service that we buy, the result would be an over-all decrease in the amount and quality of these goods and services; for the in­competent suppliers would be kept in business along with those we would select under free market conditions.

Subsidized Subways

Another kind of government-owned industry that avoids the stigma of failure is the munici­pally-owned transportation sys­tem. A certain large North Amer­ican city has a new subway sys­tem that is something of an en­gineering marvel in rapid transit. One is picked up in a beautiful new underground subway station and whisked to the heart of the city in cars that ride almost as smoothly as the latest jet aircraft.

To the uninformed, this rapid transit system is a dazzling suc­cess. Unfortunately, it is actually a dismal failure, for it was built by public funds and cannot pay its operating expenses out of its fares. Were it a privately-owned firm, it would already be in bank­ruptcy. But it is kept alive by subsidy, and the persons who use the system literally enjoy a free ride at everybody’s expense. Nor is it possible to raise fares to cover the true cost of operation and perhaps give the taxpayers a "profit." Had this alternative been open, we must remember, it would have drawn private capital into the venture originally.

Regulated Rates

What happens when failure oc­curs in an industry that is pri­vately owned but publicly regu­lated? One serious effect is that the owners are unable to liquidate their investment without some kind of permission from the au­thorities. If a radio station has been losing money, for example, the owners are forced to continue losing money until they can find a new buyer and the Federal Com­munications Commission approves of the license transfer—a proce­dure that may take months. If an airline has been losing money to such an extent that its manage­ment decides that the best alterna­tive is a merger with a healthier concern, this near life-and-death matter for the company cannot be disposed of without governmental approval. If a railroad wishes to discontinue an unprofitable branch line or adjust its rates, it can do so only with permission from state or federal authorities. And in eco­nomic affairs, this matter of delay becomes a critical thing, for it means a continuance of the ad­verse conditions that made the proposed move necessary. In some cases it is as if a group of doctors held a lengthy conference and ar­gued about a means of dealing with a situation while the patient bled to death.

Government’s practice of rescu­ing ailing industries with a sub­sidy or some other favor is also highly questionable. As we know, this is often undertaken for hu­manitarian reasons, and the pub­lic is sometimes moved to pity those unemployed as a result of the failure. Farm subsidies often are advocated on the grounds that the "small farmer must be saved," although we seldom learn just how many small farmers actually are saved by the subsidy program and why it is so necessary to "save" the small farmer rather than let the free market guide him into new methods or into some other work.

Unemployed Miners

Lately, the depression in the coal mining industry has also be­deviled the nation’s conscience, and one national weekly news magazine featured a particularly touching and pathetic cover story on the troubles of an unemployed Kentucky miner. Such a story al­most moves one to demand that Congress scrap the capitol dome, if necessary, to get the unem­ployed miners back to work. It seems pompous and hardhearted to ask why the coal industry is languishing and if it will ever make a comeback. And if the government adjusts its own purchas­ing practices to create more uses for coal, as has been suggested, does this create unemployment in another extractive industry and also saddle the government with a less efficient fuel?

It’s hard to find an answer to the coal miners’ problems, but a safe assumption is that it lies in the direction of more market free­dom rather than less. For their problem is that coal failed in the market place when placed in com­petition with gas and oil. Mean­while, mine operators chose to mechanize rather than pay the wage rates demanded by the miners. Any subsidy for the coal industry or the distressed coal towns is simply a government at­tempt to repudiate, through its powers of taxation, the decisions the users of coal have been mak­ing about it for some time.

Thus we see that governments cannot really prevent failure; they can only mask it or use their power to force the rest of society to subsidize certain parts of it. While this is ostensibly humani­tarian, the long run effects must be a slowing down of progress and continuous unemployment, along with demands for further subsi­dies in the form of public works and the like. Allowing failures to eliminate or to correct themselves as efficiently as possible is one of the most important functions of the free market.

Businesses fail because among other things they cannot hold their costs in line and retain the allegiance of their customers. Let the responsibility for learning how to succeed remain with the managers of the failing business­es. The grim alternative is an economy where nobody fails and nobody succeeds—but everybody stagnates.

 

 

***

Ideas on Liberty

Ralph Waldo Emerson

There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better for worse as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried.

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September 1963

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