23 Things They Don't Tell You About Capitalism

restructuring, launched it as a new entity. In the process, it spent a staggering $57.6 billion of taxpayers’ money.

It may be argued that the rescue was in the American national interest. Letting a company of GM’s size and inter-linkages collapse suddenly would have had huge negative ripple effects on jobs and demand (e.g., fall in consumer demand from unemployed GM workers, evaporation of GM’s demand for products from its supplier firms), aggravating the financial crisis that was unfolding in the country at the time. The US government chose the lesser of the two evils, on behalf of the taxpayers. What was good for GM was still good for the United States, it may be argued, even though it was not a very good thing in absolute terms.

However, that does not mean that we should not question how GM got into that situation in the first place. When faced with stiff competition from imports from Germany, Japan and then Korea from the 1960s, GM did not respond in the most natural, if difficult, way it should have – producing better cars than those of its competitors. Instead, it tried to take the easy way out.

First, it blamed ‘dumping’ and other unfair trade practices by its competitors and got the US government to impose import quotas on foreign, especially Japanese, cars and force open competitors’ home markets. In the 1990s, when these measures proved insufficient to halt its decline, it had tried to make up for its failings in car- making by developing its financial arm, GMAC (General Motors Acceptance Corporation). GMAC moved beyond its traditional function of financing car purchases and started conducting financial transactions for their own sake. GMAC itself proved quite successful – in 2004, for example, 80 per cent of GM’s profit came from GMAC (see Thing 22).[1] But that could not really hide the fundamental problem – that the company could not make good cars at competitive prices. Around the same time, the company tried to shortcut the need for investing in the development of better technologies by buying up smaller foreign competitors (such as Saab of Sweden and Daewoo of Korea), but these were nowhere near enough to revive the company’s former technological superiority. In other words, in the last four decades, GM has tried everything to halt its decline except making better cars because trying to make better cars itself was, well, too much trouble.

Obviously, all these decisions may have been best from GM’s point of view at the time when they were made – after all, they allowed the company to survive for a few more decades with the least effort – but they have notbeen good for the rest of the United States. The huge bill that American taxpayers have been landed with through the rescue package is the ultimate proof of that, but along the way, the rest of the US could have done better, had GM been forced to invest in the technologies and machines needed to build better cars, instead of lobbying for protection, buying up smaller competitors and turning itself into a financial company.

More importantly, all those actions that have enabled GM to get out of difficulties with the least effort have ultimately not been good even for GM itself – unless you equate GM with its managers and a constantly changing group of shareholders. These managers drew absurdly high salaries by delivering higher profits by not investing for productivity growth while squeezing other weaker ‘stakeholders’ – their workers, supplier firms and the employees of those firms. They bought the acquiescence of shareholders by offering them dividends and share buybacks to such an extent that the company’s future was jeopardized. The shareholders did not mind, and indeed many of them encouraged such practices, because most of them were floating shareholders who were not really concerned with the long-term future of the company because they could leave at a moment’s notice (see Thing 2).

The story of GM teaches us some salutary lessons about the potential conflicts between corporate and national interests – what is good for a company, however important it may be, may not be good for the country. Moreover, it highlights the conflicts between different stakeholders that make up the firm – what is good for some stakeholders of a company, such as managers and short-term shareholders, may not be good for others, such as workers and suppliers. Ultimately, it also tells us that what is good for a company in the short run may not even be good for it in the long run – what is good for GM today may not be good for GM tomorrow.

Now, some readers, even ones who were already persuaded by this argument, may still wonder whether the US is just an exception that proves the rule. Under-regulation may be a problem for the US, but in most other countries, isn’t the problem over-regulation?

299 permits

In the early 1990s, the Hong Kong-based English-language business magazine, Far Eastern Economic Review, ran a special issue on South Korea. In one article the magazine expressed puzzlement at the fact that, even though it needed up to 299 permits from up to 199 agencies to open a factory in the country, South Korea had grown at over 6 per cent in per capita terms for the previous three decades. How was this possible? How can a country with such an oppressive regulatory regime grow so fast?

Before trying to make sense of this puzzle, I must point out that it was not just Korea before the 1990s in which seemingly onerous regulations coexisted with a vibrant economy. The situation was similar in Japan and Taiwan throughout their ‘miracle’ years between the 1950s and the 1980s. The Chinese economy has been heavily regulated in a similar manner during the last three decades of rapid growth. In contrast, over the last three decades, many developing countries in Latin America and Sub-Saharan Africa have de-regulated their economies in the hope that it would stimulate business activities and accelerate their growth. However, puzzlingly, since the 1980s, they have grown far more slowly than in the 1960s and 70s, when they were supposedly held back by excessive regulations (see Things 7 and 11).

The first explanation for the puzzle is that, strange as it may seem to most people without business experience, businesspeople will get 299 permits (with some circumvented along the way with bribes, if they can get away with it), if there is enough money to be made at the end of the process. So, in a country that is growing fast and where good business opportunities are cropping up all the time, even the hassle of acquiring 299 permits would not deter business people from opening a new line of business. In contrast, if there is little money to be made at the end of the process, even twenty-nine permits may look too onerous.

More importantly, the reason why some countries that have heavily regulated business have done economically well is that many regulations are actually good for business.

Sometimes regulations help business by limiting the ability of firms to engage in activities that bring them greater profits in the short run but ultimately destroy the common resource that all business firms need. For example, regulating the intensity of fish farming may reduce the profits of individual fish farms but help the fish- farming industry as a whole by preserving the quality of water that all the fish farms have to use. For another example, it may be in the interest of individual firms to employ children and lower their wage bills. However, a widespread use of child labour will lower the quality of the labour force in the longer run by stunting the physical and mental development of children. In such a case, child labour regulation can actually benefit the entire business sector in the long run. For yet another example, individual banks may benefit from lending more aggressively. But when all of them do the same, they may all suffer in the end, as such lending behaviours may increase the chance of systemic collapse, as we have seen in the 2008 global financial crisis. Restricting what banks can do, then, may actually help them in the long run, even if it does not immediately benefit them (see Thing 22).

It is not just that regulation can help firms by preventing them from undermining the basis of their long- term sustainability. Sometimes, regulations can help businesses by forcing firms to do things that may not be in their individual interests but raise their collective productivity in the long run. For example, firms often do not invest enough in training their workers. This is because they are worried about their workers being poached by other firms ‘free-riding’ on their training efforts. In such a situation, the government imposing a requirement for worker training on all firms could actually raise the quality of the labour force, thereby ultimately benefiting all firms. For another example, in a developing country that needs to import technologies from abroad, the government can help business achieve higher productivity in the long run by banning the importation of overly obsolete foreign technologies that may enable their importers to undermine competitors in the short run but will lock them into dead-end technologies.

Karl Marx described the government restriction of business freedom for the sake of the collective interest of the capitalist class as it acting as ‘the executive committee of the bourgeoisie’. But you don’t need to be a Marxist to see that regulations restricting freedom for individual firms may promote the collective interest of the entire business sector, not to speak of the nation as a whole. In other words, there are many regulations that are pro- rather than anti-business. Many regulations help preserve the common-pool resources that all firms share, while