Monday, October 27, 2008

Risk, Rewards, and Competition

In my last post, I mentioned my gratitude for FedEx. I recently read Russell Roberts’ book The Price of Everything. Late in the book Roberts drops the name of Fred Smith, the founder and CEO of FedEx. One of the book’s main characters makes a point that there must be rewards available to encourage people to dream big enough to risk entrepreneurship. Contrasting the U.S. with Cuba, she says (p. 160):
“We dream and they don’t. We imagine. We look to the future in a way that lets us plan. We save. We invest. We forego pleasure today for something greater tomorrow and we understand why we’re doing it. Jonas Salk dreams of curing polio or Fred Smith dreams of a way to get a package to someone overnight or Steve Jobs dreams of a way to carry 20,000 songs in your pocket…. And it’s not just the entrepreneurs doing the dreaming. We dream, too. Just to take one example, millions of Americans now try to lead healthier lives than they did in the past. They decide to exercise more and eat better. Think of the enormous range of things that have to happen and that do happen to let those plans and dreams come to reality. New kinds of food in the grocery store. New kinds of grocery stores. New kinds of running shoes and racquetball shoes and walking shoes. New kinds of clothes made of new materials that make sweating more pleasant. New kinds of exercise machines. Videos to go with them. New kinds of bikes. More tennis rackets. New kinds of tennis rackets. People to make all those things and work in all those places making and selling and explaining to people about the new choices that are available. An enormous army of workers and creators springs into action. The plans of all the people who want to eat better and exercise more got matched with the plans of all the entrepreneurs who strove to make money meeting those desires.”
There is a good discussion in the book as well about why monetary rewards are essential to this system and why purely altruistic motivations don’t produce these kinds of results. Perhaps I’ll post about this in the future.

In a comment on my Oct. 24 post, I referred to an interview with Fred Smith. While I don’t agree with everything Smith is reported to have said, I think he has some keen insights on the causes of our current financial debacle. He notes that federal taxes are structured to benefit the financial sector and harm asset-intensive sectors, such as manufacturing. Smith explains how this hurts business, reduces productivity, and limits growth of good jobs. He also suggests that our system encourages over-leveraging by the financial sector.

We didn’t arrive at our current tax structure in a moment and there have been many lobbyists that have influenced tax policy over the years. But it seems that the most popular policies among our political class are specifically designed to exacerbate the problems rather than make them better.

I note that the politicians are experts at putting these policies in pretty packages and promoting them, much like the retailers that are now trying to hawk heavily advertised junk toys for Christmas. I explain to my kids that the toys rarely work as well or bring the kind of satisfaction as portrayed on TV. The same holds true for many tax policies.

Regardless of whether one agrees with Fred Smith’s view of public policy or not, I am grateful that he has dreamt up and developed a business that makes it possible for HP to fix my laptop and have it back on my desk in a few days’ time.

One of the main characters in The Price of Everything is challenged for holding the politically incorrect view that “Wal-Mart is good for America.” She retorts (p. 144), “No, I think the process that produces Wal-Mart is good for America.” When asked if that isn’t the same thing, she says:
“Not at all. If Wal-Mart can’t meet its competition’s quality and prices, I want it to go out of business. Which it probably will some day, just like many of its competitors before it.”
I would say that, despite the fact that I think FexEx provides a good service, what she says goes for them as well. This character goes on to discuss government rules that require businesses like Wal-Mart to pay their workers more or to provide better benefits for them.
“These ideas, even when they’re well-intentioned, will end up hurting the people you’re trying to help by making it more costly to hire workers. And they’re not always well-intentioned. Most of the impetus for those moves comes from competitors who want to handicap a successful rival. That’s a bad option to offer a company—instead of finding a better way of pleasing your customers, spend your time in Washington or your state capitol trying to convince politicians to give you an artificial advantage.”
The recent mantra from Washington and Wall Street has been that government assistance is needed to save financial institutions that are “too big to fail.” The argument is that so many of us rely on these firms that failure would devastate the economy in unacceptable ways. Perhaps it would be more accurate to say that failure of these big firms would devastate the lobbying efforts of these firms and the future prospects of some key politicians.

But if these firms really are too big to fail, we need to ask precisely how they got that way and what needs to be done to remedy the problem. The anti-competitive regulatory structures that many of these firms have lobbied for need to be corrected. The corporate welfare that protects these firms from competition needs to be stopped. And in case you’re wondering which politicians support this stuff, check out who is receiving masses of campaign donations from these sectors.

If we want more businesses to spring up that better meet our needs and wants, we need to permit rewards. But we also need to foster healthy competition. Unfortunately, that’s not the kind of message we are sending to our politicians nowadays. We want rewards without the risk. This cannot be had in the long term. Pursuit of such a path produces the kind of financial problems we have today, as expertly noted here by celebrated economist Arthur Laffer. It’s time to change this.


Frank Staheli said...

I've begun to notice that Wal-Mart's quality is subpar. With that, and the idea by some that Wal-Mart is too big to fail, I won't cry any tears when it does.

Your quote says about US vs. Cuba: "We dream and they don't."

One of our problems is that we've begun to stop dreaming. We've instead decided that we hope without hope that government will redistribute America's wealth to us without effort on our part.

Scott Hinrichs said...

You've got that right. Along with this goes the assumption that the producers will continue to produce at high enough rates for their largess to be redistributed to the pandering masses.

The thing that those to whom this populist theory appeals fail to understand is that big government redistribution schemes work like taking hay from those that grow and store more of it and giving it to those that grow and store less of it by first passing it through the government horse. Not only is there less hay to go around, but you end up with a bloated horse.