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Wednesday, June 10, 2009

Government Motors: Why It Will Fail

Ludwig von Mises predicted the outcome of Barack Obama's General Motors Experiment

If you like Amtrak and the Postal Service, then you surely will love “Government Motors,” as the entity most responsible for the carmaker’s demise takes control.  When Ludwig von Mises wrote Bureaucracy in 1944, he understood then what we are seeing now with GM.  Mises understood that the bureaucratic model could not effectively be applied to business.  Furthermore, he also stated that if businesses become bureaucratic, they do so precisely because of the presence of government pressure on their day-to-day activities.

The usual canards thrown at GM include (1) GM did not build cars consumers wanted, (2) the quality of GM cars was lower than the quality of competitive brands, (3) GM’s management was not responsive to consumers, and (4) GM concentrated on building “gas-guzzling” SUV’s instead of building smaller cars that did not use as much gasoline.  All are true, in one sense, but they did not originate with GM or its management as much as they came about because of government policies.

Mises understood that in a free market, no business would bureaucratize itself, as such a move would generate costs upon costs for which there would be no market for the end result.  Businesses exist only because of the decisions made by consumers to purchase their goods, and for no other reason.  They do not exist to provide employment for workers; employment opportunities exist only as long as consumers are willing to purchase those goods made by the employees.

As long as consumers have choices, they will use them, especially if a particular business is unresponsive to them.  In the case of GM, the real story is not with any deliberate intransigence on behalf of the GM management, but why it chose to be intransigent in the first place.  This certainly was not the case with GM during the Great Depression, when the company still managed to eke out a profit.

Government moved against GM on many fronts.  First, the government made it clear it stood behind the United Auto Workers union when it organized GM and whenever the union went out on strike.  Second, the unions were able to take what once had been a mark of efficiency – GM’s vertical integration – and turn it into a liability by holding the company hostage at various stages of production.

Second, government employment mandates created the requirement for GM to create a bureaucracy to deal with the huge amounts of forms and regulations that were levied by various departments of the state and federal governments.  Furthermore, because labor unions are primarily political creatures, the politics of organized labor forced GM and other firms to adopt bureaucratic methods to please their government “superiors.”

Third, the UAW made it extremely difficult for GM to be flexible and to adopt production methods that would have enabled it to be competitive.  (Indeed, we have seen the same problems at Ford and Chrysler, and Chrysler essentially is bankrupt like GM.  Ford barely hangs on.)

The government and union-created inflexibility that became institutionalized at GM magnified both successes and failures.  Furthermore, because GM’s comparative advantage was in trucks and sport utility vehicles, the company also became hostage to spikes in gasoline prices.

It is true that GM did not make many small, fuel-efficient cars, but it was due to the hard fact that GM’s labor contracts were so costly and so inflexible that the company could not step out and take any chances and make those cars.  Unfortunately, because the Obama administration is pretty much a wholly-owned subsidiary of the UAW, the new “Government Motors” will be just as inflexible, which means that even though GM will be building new “small” cars, nonetheless the company still will lose money (like Amtrak and the Postal Service) as the modern-day “Trabants” move along the assembly lines.  And when we stop buying these lousy products?  Well, the hard truth is that the government, in an attempt to prop up the UAW, will hamstring GM’s foreign competitors.  That means shoddy products and “service with a snarl.”

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.