Monday, November 17, 2008

Why our economic system needs more sex

A lot of people are resistant to the current round of bailouts because they amount to corporate socialism. Or because it rewards the jerks who ran the companies amok in the first place, and incents bad behavior. On the other hand, a lot of people are afraid not to bail out the companies that have screwed themselves up so badly because those companies are "too big to fail".

It's true, they are. So fix it.

The only mechanism this country has to break up an excessively large company is anti-trust laws. Certainly under the current administration, no corporation was going to get cut up using that knife, not when huge mergers of huge companies was the mantra.

The problem with these huge companies is not their size, but the lack of diversity they cause.

For those of you who's study of evolution in biology class wasn't stunted by folks who find it to be an affront to their religion, you may recall that a key component of the whole works is diversity. When selection pressures change, some species don't do so well. This is why global climate change is stressing ecosystems as we know them, and so on. Well, if you have a highly diverse ecosystem, some of the species will do just fine in the new ecosystem, and others will die out completely.

This is the natural order of things.

However, if a relative few species are able to excessively dominate and optimize themselves for the existing conditions, the ecosystem as a whole is less able to adapt to change in conditions. Then, when a drastic change occurs, the entire system collapses. Think dinosaurs and comets.

And so, we are stuck in a situation where our corporate ecology is insufficiently diversified. The entire ecosystem has been based on two things: cheap credit and cheap fuel. Cheap credit means it is too easy to borrow and too hard to save. Cheap fuel means it's cheaper to build stuff wherever labor is cheapest and then ship it to where it needs to go.

The only reason the US Auto industry didn't go into cardiac arrest several years ago is that relatively cheap gas made it acceptable to drive an oversized SUV (which were exempt from strict mileage standards due to being 'light trucks' instead of 'cars') and to load it up with luxury items (which give the manufacturer a better profit margin) and then cut the buyer a low-interest long-term loan that has a palatable monthly payment because it stretches things out for six years. On a car that will start to have serious problems before it's three years old.

I recently read an article that pointed out not only the consolidation of the US auto industry over the last century, but also the fact that the UAW has had a monopoly on labor for the US auto industry (except, of course, for all the plants run by non-US companies without unionized labor). Given that the UAWs pattern was to negotiate a contract with one of the big three, and then use that as a template for the other two, it means that effectively, the big three have had no ability to differentiate on their workforce.

So, how do we fix this? Because right now it's banks and auto companies, but before you know it, it will bethe media companies, the telcos, the airlines (who are still merging, see Delta and Northwest), and any other major industry in consolidation mode.

We need the ability, and political will, to prevent dangerous consolidation. If there is going to be a bailout of the big three, fine. But put them into receivership, throw out their contractual albatrosses, and break 'em up. Make Chevy compete with Saturn and Buick. While you're at it, split up the UAW. Give the union some competition for workers and businesses.

So, where is the sex in all this? Did you read all this way just to find it? Alas, there's nothing salacious here. Getting back to evolutionary biology: sexual reproduction is the source of diversity. The combination and recombination of different sets of genes makes for a diverse population. See here for a bit more on that, but companies need more cross-fertilization. US auto companies should be looking not only at how foreign auto companies work, but also at how other industries work and have succeeded. Hire in people from other places. Shake it up a little. Some ideas, some companies will fail. But in the end the system as a whole will be stronger and more successful, and more able to withstand the next downturn.

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