The Auto Bailout: What is the Purpose of Business

One of the problems I have with economic liberalism is that it fails to recognize the purpose of business. Listen to any populist liberal on the campaign trail and you would think that corporations were created to provide jobs for Americans. Companies are routinely demonized for daring to go outside the U.S. to find workers because they've found the labor cheaper there (THE HORROR). The purpose of business is to maximize profits. To borrow from Gordon Gekko,

that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit

Companies aren't in this for any other reason but the most selfish of them all, GREED. If employers could, they'd pay their employees nothing, they'd charge their customers as much as possible, and they would use as cheap a product as possible. It is the free market system that creates a delicate balance that forces all involved to find an equilibrium point between all of this. Adam Smith referred to this as the invisible hand. Ultimately though, a business needs to make every decision with only one goal in mind, maximizing profits. Economic liberals don't see the world in such a way, but unless all businesses are able to maximize profits no one will want to start a business.

This brings me to this very troubling piece by E.J. Dionne.

A hideous class bigotry has disfigured this debate.

The failure of the Big Three is regularly attributed to the high wages and benefits earned by members of the United Auto Workers union, and it's true that the Detroit-based auto companies operate under heavy "legacy costs" for retirees' pensions and
health coverage negotiated during the industry's fat times.

But the blame-the-workers-first cant ignores the fact that if the Big Three had designed better cars, they would not have lost as much market share to Toyota, Nissan and other competitors. The unions did not stop management fromproducing a better product -- and I say that as someone who has enjoyed driving Saturns for the last 15 years.

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But "properly structured" is in the eye of the beholder, and if this bailout happens, it should reflect the core reason it will pass: Long-term economic growth depends upon a well-paid middle class (and that definitely includes autoworkers) with real purchasing power. If saving our auto industry means moving GM workers ever closer to Wal-Mart wages, the bailout isn't worth doing.

For economic liberals like Dionne any government bailout should serve only one function, protecting the living wage of the employees of said company (in this case the automakers) Whether or not such a wage can keep said companies profitable for the long term is entirely irrelevant to someone like Dionne. I have a friend that ran several businesses and he told me that he seemed to always ultimately find himself in a position where his workers got paid, his suppliers got paid, his customers got a good deal, only after all this there was nothing left for him. That's of course no way to run a business, but for someone like Dionne, he would be the model of a successful business. Someone one like Dionne would be happy to give someone like my friend loads of money just as long as he continued to promise to take care of everyone but himself.

Currently, our government is frustrated that the bailout of the banks has been used mostly to hoard cash. The Feds were hoping that the banks would use this money to lend. Yet, it was significant undercapitalization, not enough cash, that caused these banks to get into dire financial straits to begin with. The banks see more capitalization as the key to their long term viability. They were given free money and they are holding onto it because keeping it is their best strategy for long term survival.

Therein lies the rub of all bailouts. Companies are in business to make money. Governments do bailouts because they see a certain company as vital to jobs, the economy, and the health of the nation. That's not how the companies themselves see themselves. The bigwigs at the big three may give Congress some sob story about being vital to the fabric of society, but in reality they are only concerned with making money for the company.

No one can expect a company to change its goals just because the government gives it money. Furthermore, if they were to change, they would fail even quicker. That's why I am fundamentally against bailouts. Companies have failed at their primary function, making money, and yet we are all too willing to give them even more money. We give them billions because we fail to realize why business happens, to make money. The idea that autos should be bailed in order to keep workers employed is as naive as it is dangerous. Companies should only stay open if they are profitable. If they are not they need to go away. All bailout decisions should be made with this in mind, not some silly notion that companies are in business to provide jobs.