The Failures of Private Enterprise; M. Barger

cans except a few splinter groups of eccentrics call them selves "socialists," for "socialism" won't sell under its own brand name. Free enterprise has been so successful that even its opposite has to be offered as a form of free enterprise! Yet, there are thousands of business failures every year in the United States, to say nothing of costly mistakes made by companies which nonetheless manage to stay solvent. All of these failures are costly also in terms of hu.. man anguish. Nobody likes to talk about them; they are Mr. Barger, formerly in industrial public relations work, is now on the editorial staff of The Wall Street Journal. 169 170 MELVIN D. BARGER skeletons in the closet of American business. This is re grettable, for the very failures of private enterprise are a powe'fful argument in favor of maintaining as much free dom as possible. Failure has its rightful function in the free market place, and we ,ought never to suppose for a moment that failure is completely bad. It has some im portant uses which ought to be examined and talked about.

Three Case Studies Here are three actual business failures that will serve as cases in point: • Six years ago a giant, automobile company risked over $200 million in the design, production, and promo tion of a new car. In a short time it had to be taken off the market, leaving only an assortment of jokes and a badly disillusioned group of dealers; • A small Michigan firm with a seasonal product di versified into. the school seating business, which appeared extremely attractive and profitable during the early planning stages. Powerful competition and other forces finally caused them to liquidate the project, at a heavy cost; • An electronics finilt built a special plant for the pro duction of gears under a government contract. Produc tion· costs iIi' this unfamiliar business drove them'to the wall, and only a fortunate sale of the plant and Illa~ chinery saved the company from immediate insolvency.

THE FAILURES OF PRIVATE ENTERPRISE 171 Now these were personal tragedies for the persons di rectly involved. Investors suffered through losses in sav ings, suppliers were deprived of valuable customers, em ployees lost jobs, and executives were demoted or forced to resign. In view of the "wear and tear" that failure im poses on human feelings, it is tempting to demand relief measures of some kind. The. dealers who risked their savings on the new car had nothing to do with the ad verse market conditions that caused it to fail. The em ployees who. were laid off because their company failed to make good in the school seating business were. acting in good faith; they probably did their own work effi ciently and well. And the small Midwestern community that had such high hopes for the electronics firm's gear business did not really deserve the blow that came w.nen the plant closed. In all of these' cases, the free market seemed to deal brutally with some rather innocent and decent people.

It so happens that 'in the three cases cited, little provi sion was made to soften the impact of failure. These were industries that did not have some kind of a pipeline into public funds, so the business managers had to "eat their own· rnistakes." Except for unemployment payments to laid-off employees, everybody involved had to· take the consequences of failure. Andtheresult~ in each case~ was that the managers took decisive and energetic steps to liquidate the failing operation' as rapidly as possible. They had to, 'in order, to avoid disaster. There was a happy sequel to each failure. The auto mobile company went on to enjoy some unexpected sales 172 MELVIN D. BARGER successes with a sports-type car and the soon-to-appear compacts. It was able to use many of the production fa cilities that had been assigned to the defunct model. The company that failed in the school seating business ap plied its energies more determinedly than ever in its own line, grateful that they had withdrawn from the ill advised seating venture before losses became unendur ably heavy. And the plant vacated by the unhappy elec tronics firm was purchased by a growing, well-financed company that has since expanded the facility and tripled employment.

Hence, it should be clear that although failure was un desirable, and resulted from somebody's mistaken judg ment, the free market put a "stop loss" on it as quickly as possible, thus halting further drains on scarce capital and other resources. Market·· freedom is, in fact, prac tically indispensable in the handling of a business fail ure. Business managers have to be able to take action without delay, and in some cases the losses might be so great that any postponement at all will be fatal. There is also the chance that corrective measures might save the situation; here again, the manager needs the freedom to act promptly. A third reason, one that is often impor tant to the workers and the community where the busi ness is located, is that decisive action may eventually transfer the plant and equipment to more capable hands. None of this should be interpreted to mean that fail ure is being glorified or is something particularly char acteristic of the free enterprise system. It is only to say that the free market place has some built-in methods of THE FAILURES OF PRIVATE ENTERPRISE 173 dealing with failure that all other systems lack. Under any other system, failure continues to perpetuate itself, with hidden but nevertheless real losses to the entire community.

Controlled Failures Now let us turn to .the controlled market place and see what happens when failure occurs. Controlled businesses can be either those that are directly owned by the gov ernment, such as the Post Office, or those privately owned but regulated by a government agency. In either case, the "failure" mechanism is not allowed to perform its proper role. Failure happens, but it is "remedied" by doses of subsidy or by regulation that thwarts the called-for liqui dation of a questionable operation. As more and more legislation is passed giving the government additional controls over the economy, it also becomes increasingly difficult to deal wisely with failure. We are sadly familiar with the methods of handling failure in government-owned enterprises. The postal def icit is something that seems to get aired annually, and as all of us know, Congress always finds the funds to make it up. It is common knowledge that the Post Office has hundreds of operations around the country that probably fail to pay their own way, and that the rates for the various classes of. mail have been decided by po litical considerations rather than economic ones. And it is politically impossible for Congress to make the hard decisions that the market place makes automatically for 174 MELVIN D. BARGER the privately-owned firm. Thus, rather than shut down certain services that are losing huge sums of money, the Post Office department allows the public to fool itself by paying through taxes for the services it does not pay for directly in postage. Some mail users also get huge benefits that everybody pays for, since not all people use the mails equally.

Were this same principle applied to every commodity and service that we buy,. the result would be an overall decrease in the amount and· quality of these. goods and services; for the incompetent suppliers would be kept in business along with those we would select under free market conditions. Subsidized Subways Another kind of government-owned industry that avoids the stigma of failure· is the municipally-owned transportation system. A certain large North American city has a new subway system that is something of an en gineering marvel in rapid transit. One is picked up in a beautiful new underground subway station and whisked to the heart of the city in cars that ride almost as smoothly as the latest jet aircraft. To the uninformed, this rapid transit system is a daz zling success. Unfortunately, it is actually a dismal failure, for it was built by public funds and cannot pay its operat ing expenses out of its fares. Were it a privately-owned firm, it would already be in bankruptcy. But it is kept alive by subsidy, and the persons who use the system literally THE FAILURES OF PRIVATE ENTERPRISE 175 enjoy a ftee ride at everybody's expense. Nor is it possi ble to raise fares to cover the true cost of operation and perhaps give the taxpayers a "profit." Had this alterna tive been open, we must remember, it would have drawn private capital into the venture originally.

Regulated Rates What happens when failure occurs in an industry that is privately owned but publicly regulated? .One serious effect is that, the owners are unable to liquidate their in vestment without some kind of permission from the au thorities. If a radio station has been losing money, for example, the owners are forced to continue losing money until they can find a new buyer and the Federal Com munications Commission approves. of the license trans fer-a procedure that may take months. If an airline has been losing money to such an extent that its manage ment decides that the best alternative is a merger with a healthier concern, this near life-and-death matter· for the company cannot be disposed of without governmental approval. If a railroad wishes to discontinue an unprofit c,tble branch,line or adjust its rates, it can do so only with permission from state or federal authorities. And in eco nomic affairs, this matter of delay becomes a critical thing, for it means a continuance of the adverse condi tions that made the proposed move necessary. In some cases it is as if a group of doctors held a lengthy confer ence and argued about a means of dealing with a situa tion while the patient bled to death.

176 MELVIN D. BARGER Government's practice of rescuing ailing industries with a subsidy or some other favor is also highly ques tionable. As we know, this is often undertaken for hu manitarian reasons, and the public is sometimes moved to pity those unemployed as a result of the failure. Farm subsidies often are advocated on the grounds that the "small farmer must be saved," although we seldom learn just how many small farmers actually are saved by the subsidy program and why it is so necessary to "save" the small farmer rather than let the free market guide him into new methods or into some other work. Unemployed Miners Lately, the depression in the coal mining industry has also bedeviled the nation's conscience, and one national weekly news magazine featured a particularly touching and pathetic cover story on the troubles of an unem ployed Kentucky miner. Such a story almost moves one to demand that Congress scrap the capitol dome, if neces sary, to get the unemployed miners back to work. It seems pompous and hardhearted to ask why the coal in dustry is languishing and if it will ever make a comeback.

And if the government adjusts its own purchasing prac tices ·to create more uses for coal, as has been suggested, does this create unemployment in another extractive in dustry and also saddle the government with a less efficient fuel? It's hard to find an answer to the coal miners' prob lems, but a safe assumption is that it lies in the direction rHE FAILURES OF PRIVATE ENTERPRISE 177 of more market freedom rather than less. For their prob lem is that coal failed in the market place when placed in competition with gas and oil. Meanwhile, mine oper ators chose to mechanize rather than pay the wage rates demanded by the miners. Any subsidy for the coal in dustry or the distressed coal towns is simply a govern ment attempt to repudiate, through its powers of taxa tion, the decisions the users of coal have been making about it for some time. Thus we see that governments cannot really prevent failure; they can only mask it or use their power to force the rest of society to subsidize certain parts of it. While this is ostensibly humanitarian, the long run effects must be a slowing down of progress and continuous unemploy ment, along with demands for further subsidies in the form of public works and the like. Allowing failures to eliminate or to correct themselves as efficiently as possible is one of the most important functions of the free market.

Businesses fail because among other things they cannot hold their costs in line and retain the allegiance of their customers. Let the responsibility for learning how to suc ceed remain with the managers of the failing businesses. The grim alternative is an economy where nobody fails and nobody succeeds-but everybody stagnates.