"There is no remembrance of former things; neither shall there be any remembrance of things that are to come with those that shall come after."
- Ecclesiastes 1:12
"Your castles may tumble (that's fate after all)
Life's really funny that way
No use to grumble, smile as they fall
Weren't you king for a day?"
- From "Wrap Your Troubles in Dreams" (1931), lyrics by Ted Koehler and Billy Moll
The news coverage of Steve Jobs' retirement from Apple predictably discussed his greatest successes: the iMac, the iPod, the iPhone, and the iPad. But many articles about this event also covered his failed projects: the Apple III, the Apple Lisa, and the NeXT workstation. This is commendable, for Jobs' clunkers are an important part of the story. We learn more from failure than we do from success. If Jobs did not learn from his blunders, he might never have come up with the iPhone.
There is a failed project that can teach us a lot about our current financial crisis: the book "The New Industrial State" by famed economist John Kenneth Galbraith, based on a lecture series broadcast by the BBC. The main theme of this book is that the large corporations are no longer subject to market forces. Galbraith contends that the big industry leaders can use a combination of leverage, advertizing, and consolidation to squash any competitor that threatens them. The book focuses on several large corporations that J.K. Galbraith contends will always dominate their industry.
So what's the problem with this book? Well, it was first published in 1967, and as fans of Mad Men can tell you, the markets have changed quite a lot since the 1960's. Back then, General Motors made more than half of the cars sold in the U.S., as well as a significant share of some foreign markets. So naturally "The New Industrial State" assures us that GM is one of the companies that need not worry about competition. When it comes to computers, whether we are talking about hardware or software, the book asserts that the one company that matters will always be IBM. And what about retail? Remember, 1967 is before Walmart or even Kmart made it big, so the book's examples of the forever dominant retailers are Sears (currently on the ropes) and Montgomery Ward (went bankrupt in 2000, although recently revived as an online store). These 1960's corporate giants lost their market dominance to new companies whose innovations won over the customers. The history of the last few decades provides the definitive rebuttal to "The New Industrial State": even the largest corporations must remain competitive to stay alive.
The basic premise of "The New Industrial State" is widely believed today. If only I had a dime for each prediction that the internet will no longer be a venue of free speech because soon one company will take over the internet. Funny thing is, the company that is predicted to take over the internet keeps changing: Netscape, Microsoft, AOL, Google, and Facebook have all been projected to be our future on-line overlord. In 5 years, there will probably be some company not in this list that will be viewed as the future emperor of the internet.
Some very important insights in our current economy can be learned from the failure of "The New Industrial State".
- There is no corporation that is "Too Big to Fail". When a corporation falters, there are plenty of other companies that will pick up the slack. In the 1970's, A&P went from the largest grocery chain in the country to a chain that operated in a handful of east coast states. The closures of all those A&P stores did not cause mass starvation, for these closures were matched by openings of other grocery stores.
- The 2008 bailouts of failed large corporations were therefore unnecessary and counterproductive. At a time when the federal government could ill afford it, taxpayer dollars were wasted to reward poor corporate decisions at the expense of those companies that served their customers better.
- The government should not be in the business of picking market leaders. Keep in mind that John Kenneth Galbraith was an award winning economist who advised presidents FDR and JFK. If Galbraith could not predict which companies would prevail, what chance do we have that our current experts can safely invest our tax dollars in future winning companies? This is the sort of hubris that lead to the Solyndra debacle.
