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Business Simplified for Idiots


Business is simple. But apparently some people can't handle 'simple'.

 

 

One thing that scares me on occasion, is when people tell me I'm intelligent.  Oh I'm no moron, but I write about a lot of what seem to be obvious things, yet a lot of folks seem to have missed these basic facts.  For instance, we've been subjected to a lot of whining about how hard graduates are finding it to get a good job, and politicians are shocked to learn that gimmicking the system to help their buddies is bad for the economy.  It's really pretty simple to understand how money works in an economy, and what someone has to do to get a job, yet a lot of folks seem to fail at even basic comprehension.

 

Money works by moving.  Money has value only when someone accepts it for a product or service, which means a transaction takes place.  The money moves, whether it's gold, paper, credit, or any other accepted mode of commerce.  Holding, saving, and investing any kind of valuable works only on the assumption that the commodity or currency will be accepted in a later transaction. 

 

Period.

 

This starting point leads directly to the second point - money is made through work.  You either make something of value, or perform a service of value, and you do so either to use the product or service, in which case it's not business but self-provision, or you create the product or service for someone who will provide you a good or service of agreed quantity and quality, or an accepted token of value which you believe will hold its value for use to get a product or transaction you need or want from someone else.

 

Period.

 

All employment, therefore, is done with the intent of collecting units of assumed value for use in later transactions, and all employees are hired on the promise and assumption that they will work to produce a net gain for their employer in the desired currency.

 

Period.

 

Consequently, there is no basis for hiring someone just because they want to earn money, or because they have finished school, or because they think they are entitled.  Also, all groups and organizations, including government, which seek to compel employment of persons whose net effect does not increase profitability for the company, are by nature inefficient and contrary to the company's basic reason for existing.  Activity, therefore, by governments, unions, or outside forces is by definition parasitic, and increase of such activity always damages the industry and economy where the company operates.

 

Period.

 

Taxes are collected by government to pay for goods and services the government uses, at all levels.  Therefore, taxes are by nature damaging to a business' operation, and so a business will generally seek to locate and operate wherever taxes are the least damaging .

 

Period.

 

Because most adults work as employees of businesses, the general effects of government, unions, and special political interests are inimical to the employees' best interests, as more damage than help is done by these forces to the business, and all such costs and consequences are passed along to the employees and consumers, which includes all employees since wages are used to buy things (see point one). 

 

Period.

 

Why do politicians not understand?  Why do so many kids graduating from high school and college miss these basic facts?  Because neither group has worked for a living, neither has experienced the truth of how money and employment work, and so they are alien to reality. 

 

Period.

     

 


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Comments (47)

Nice basic summary, but I h... (Below threshold)
James H:

Nice basic summary, but I have a couple nits/remarks:

1) Your statements about unions seem overly broad. There are certainly issues with unions that evolve to preserve the union rather than to safeguard employees' interests. However, unions can fulfill a useful function, as they can aggregate employees' labor into a more effective organization, much as a corporation can aggregate capital into a more effective organization.

2) Businesses exist to maximize profits as much as possible. As such, they have a great deal of incentive to engage in suspect or anticompetitive behavior. Even if we assume that businesses do not engage in fraud, you can still have issues with collusion or continusouly offloading negative externalities of a given transaction. Effective regulation is needed (often funded by taxes!) to force businesses not to engage in such behavior.

Consequently, there is no basis for hiring someone just because they want to earn money, or because they have finished school, or because they think they are entitled.

Unless it's your no-count cousin and you owe Uncle Murray a favor.

I've always thought that Ob... (Below threshold)
Jeff:

I've always thought that Obama's first job out of school was an indication of his mindset. No, it was not community organizing but working for a small financial newsletter publisher in NYC. He hated working there and never tried to make a go of it. Basically he showed he was a bright but lazy guy. The funny thing is he always says he chose to not go work for Wall Street when in fact Wall Street chose not to hire him ...
When people say, so and so hasn't worked a day in his life I usually scoff and point to something the person has done that could marginally be called work.

In the case of Obama I actually think it may the true that he hadn't actually worked a day in his life before being elected to the state Senate.

1 nit James ...... (Below threshold)
Jeff:

1 nit James ...

"However, unions can fulfill a useful function, as they can aggregate employees' labor into a more effective organization, much as a corporation can aggregate capital into a more effective organization."

yes they can force higher and higher wages which is of course good for them and bad for the company which in turn is bad for shareholders and the consumers of their products. Isn't that the same as collusion between companies to set prices to benefit them and hurt the consumer ? Both actions hurt the consumer don't they ?

Ironic isn't it that James ... (Below threshold)
PBunyan:

Ironic isn't it that James can't see that his point #2 can be applied to unions moreso than most businesses?

It is not the same collusio... (Below threshold)
James H:

It is not the same collusion, Jeff; in the case of collusion in the marketplace, you are talking about two different organizations, say, Gasex and Gassey, agreeing that they will keep prices artificially high.

If Gasex's employees unionize and attempt to force higher wages, it's not quite analalogous. Now, I would call it another story if Gasex and Gassey's employees joined the same union, then demanded the same wage and threatened to strike both companies if they didn't get it.

In terms of union benefits, I really do think that a lot of what we take for granted today, such as paid holidays and the forty-hour workweek, would not have been achieved without the early unions. Without unions in place, employers had a great deal of leverage over their employees.

RE #2: "he hadn't actual... (Below threshold)
PBunyan:

RE #2: "he hadn't actually worked a day in his life before being elected to the state Senate"

And had never produced any good or worthwhile service thereafter. Ever. Not even once.

Can we simplify it a little... (Below threshold)
Sep14:

Can we simplify it a little more for Barry? I know he's a scholar and all, but that affirmative action chip on his shoulder has blocked all comprehension of the Cahtah index he has trumped.

What we were taught to beli... (Below threshold)
PBunyan:

What we were taught to believe about the "early labor unions" and the real truth about those early labor unions are two quite different things.

Let me add some fuel to the... (Below threshold)
James H:

Let me add some fuel to the fire re: government

It is inimical to the overall economy to lower taxes for one particular business or group of businesses. This form of rent-seeking delivers value to an individual business, but at the expense of increasing other business's tax burdens.

Business even more simplifi... (Below threshold)

Business even more simplified:

Supply and demand

Period.

James H. Noone (to my know... (Below threshold)
retired military:

James H. Noone (to my knowledge) has stated that unions had no place in history at all. It is simply an outdated concept today and has become nothing but a strong arming financial appendage for democrats.

James H: "Your statemen... (Below threshold)
DJ Drummond:

James H: "Your statements about unions seem overly broad ... unions can fulfill a useful function, as they can aggregate employees' labor into a more effective organization, much as a corporation can aggregate capital into a more effective organization."

First, note that I did include 'generally'. But second, please cite a specific action by a major union in the past 50 years which benefited the company, consumers, and all of the employees.

Unions served a purpose between 1880 and 1949. Since then, I honestly cannot find a single specific action taken by a union whcih I could reasonably say improved the company, its employees in general, and the public at large.

"Businesses exist to maximize profits as much as possible."

That's not completely true. Businesses exist to maximize growth and profits in the long-term. One lesson which makes the use of Codes of Conduct attractive to companies, is that unethical conduct succeeds only in the short term. Sooner or later, the truth comes out and it invariably proves more damaging than an ethical policy used over the same period.

"they have a great deal of incentive to engage in suspect or anticompetitive behavior."

That's generally fiction. Competitors and new entrants to the industry always adapt and innovate, making the advantage short-lived. Note, for example, that over time industry leaders change regardless of product or service or industry.

"Effective regulation is needed (often funded by taxes!) to force businesses not to engage in such behavior."

Only to a point. Most regulation is politically motivated, however, which makes the value suspect. Also, you missed what I said about taxes. I did not say companies try not to pay taxes, but will seek the best business climate with regards to taxes, and as it happens, regulation. That is, it is in a business' self-interest to make a safe, quality product, but not to comply with politically-motivated restrictions which neither add value to the product nor protect the public in any real way.

James H ..You have... (Below threshold)
Jeff:

James H ..

You have a point about paid holidays and 40 hour work weeks ...
but I'm also sure you understand how a business "pays" for those things ... it is by reducing what they actually are willing to pay you or passing that cost on to their customers ...
so in the end forcing companies into 40 hour work weeks and paid vactions didn't come at no cost to society ...
I'd say the jury is still out on if unions for the last 30-40 years have benefited anyone besides the union workers ...

One point, if collective bargaining is not collusion then nothing is ... especially with the threat of striking ...

And finally, Workers in a collective bargain have absolutely no incentive to excel ... none, zero, zilch ... sounds like an attractive career doesn't it ? If you are a slacker maybe ...

First, note that I... (Below threshold)
James H:
First, note that I did include 'generally'. But second, please cite a specific action by a major union in the past 50 years which benefited the company, consumers, and all of the employees.

I suppose I could cite the general showbiz unions, but they're not "unions" as much as they are professional associations of a sort. But when I think about recent union activity, my thoughts first turn to a union at a Mott's plant in upstate New York. The plant's owners, despite having a great year, declared that in new contract negotiations, they wanted workers to take fairly substantial pay cuts in order to bring their compensation in line with what was offered elsewhere in the area.

Naturally, the workers went on strike when the plant took a hard line.

Cutting employees' salary is one thing; it happens all the time. But there's something scumtastic about a company that wants to cut wages for no other reason then to reflect local economics.

I also recall (not sure where I read about it) reading that Southwest's union actually acceded to short-term pay cuts during the economic crisis in order to help the airline continue to fly.

That's not completely true. Businesses exist to maximize growth and profits in the long-term. One lesson which makes the use of Codes of Conduct attractive to companies, is that unethical conduct succeeds only in the short term. Sooner or later, the truth comes out and it invariably proves more damaging than an ethical policy used over the same period.

Unfortunately, DJ, the current economic system doesn't promote that sort of behavior. Rather, the cycle of quarterly reports and investors' short-term trading strategies incentivize publicly traded companies to manipulate earnings in order to make their books look good in time for a particular quarterly report.

Even if certain things (Enron, MCI) come out sooner or later, I would argue that certain accounting scandals would not exist if companies did not have such intense short-term incentives.

"they have a great deal of incentive to engage in suspect or anticompetitive behavior."

That's generally fiction. Competitors and new entrants to the industry always adapt and innovate, making the advantage short-lived. Note, for example, that over time industry leaders change regardless of product or service or industry.

Again, companies are impelled to good behavior here because of antitrust laws. If you and I run ostensibly competing gas stations, for example, it is in our economic interest to collude to keep our prices as high as possible ... and to ruthlessly undercut any new market entrants so as to maintain our duopoly.

Antitrust laws can be politically motivated in that they give customers and competitors a cause of action to use against entrenched businesses that attempt to unfairly leverage their market dominance.

Also, you missed what I said about taxes. I did not say companies try not to pay taxes, but will seek the best business climate with regards to taxes, and as it happens, regulation. That is, it is in a business' self-interest to make a safe, quality product, but not to comply with politically-motivated restrictions which neither add value to the product nor protect the public in any real way.

The so-called "best business climate" for taxes is a double-edged sword. In particular, I've seen mid-sized cities get into bidding wars with each other to lure employers with more and more expensive tax breaks. While this kind of thing can promote employment in a city, a municipality that is not careful can find itself short of funds needed to deliver basic services for its constituents.

"I'd say the jury is still ... (Below threshold)
PBunyan:

"I'd say the jury is still out on if unions for the last 30-40 years have benefited anyone besides the union workers ..."

When you consider all the union shops that have closed I'd have to say they hurt a hell of lot more workers than they helped. They do still help the union bosses and Democrat politicians a lot though--that's about it.

I understand a great deal, ... (Below threshold)
James H:

I understand a great deal, Jeff.

Don't get me wrong, I have a certain distaste for what unions have become in certain circumstances. The teachers union in New York City is completely ridiculous. And any unionwide contract that restricts individuals' ability to extract maximum wages from their employer in thename of "fairness" is patently unfair.

(Note, at times in my career I have negotiated raises with an employer by claiming my work had greater merit than my co-workers'. I have also negotiated my starting salaries when I thought they were too low. Any union that stops me from doing this is incredibly annoying).

But at the same time, I tend to think of unions in the same way I think of firearms. They dangerous to you if you point them in the wrong direction and in certain situations they can do as much harm as good. But they are also handy to have available just in case certain things are needed.

James H ...If you ... (Below threshold)
Jeff:

James H ...

If you couldn't negotiate a pay raised based on your effort because you worked at a union shop I'm not sure you would consider that annoying ... I think you would use much stronger words ...

Unions were needed to force better worker safety conditions. Period. Now that we have laws that handle that unions are no longer serving a public good and only serving a union good ...

Competing in the marketplace means NEVER paying more for something than the market demands at that point ... NEVER, just because a company has a "good year" doesn't change that calculation ... and when the company had bad years where are they supposed to find the reserves to pay for that ? Mana from heaven ? No from the "good" years ... and nobody can forecast exactly how bad or good the next year may be ... so trying to get your labor costs down to the current market price is not scummy its called survival ...

Thanks James. If the examp... (Below threshold)
DJ Drummond:

Thanks James. If the examples you gave were the best you could do, then you have essentially conceded the point.

And I don't compare unions to guns. The better analogy would be vipers. There may be a theoretical argument in their favor, but their character is to be vicious and selfish, to do harm first before thinking, and they generally should be kept away from most people.

We'll have to agree to disagree regarding corporate ethics. I would suggest if your claim were accurate, we would have a lot more Enron-type scandals than we do, considering how many public corporations exist. In my experience, most companies act in a generally ethical manner, and it's individuals who cause the damage; and the history of how unethical businesses end up has long served more caution than law enforcement.

As for the bidding wars between governments, remember those are politicians, whose experience is lacking in business wisdom and whose judgment has always been suspect at best. It's not business' fault that so many city councils and career politicians are stupid. That again supports one of my main contentions, that politicians lack even common sense where business is concerned.

This post could and perhaps... (Below threshold)
Tsar Nicholas II:

This post could and perhaps should have been entitled: "Business Simplified for Liberals"

James H said<blockquo... (Below threshold)
Kenny:

James H said

Cutting employees' salary is one thing; it happens all the time. But there's something scumtastic about a company that wants to cut wages for no other reason then to reflect local economics.
Your call that there was no other reason. I'm sure that improving the bottom line profitibility and long term health of the company do NOT count as reasons to you. Perhaps they do to someone who understands business.

And isn't it scumtastic for unions to demand raises for no other reason than to reflect local economics? Most of the public unions around here have adopted 3 year contracts. Every time they're up for, Surprise Surprise, the unions argue they deserve pay raises because they are below the average salary for unionized members doing the same work. They've managed to drive their salaries way above equivalent private sector salaries by this tactic.

Unions in action, and James H approves.

Kenny:I say "scumt... (Below threshold)
James H:

Kenny:

I say "scumtastic" because it's evidence that beancounters are running a company, rather than people. If a company is successful, good managers recognize that good employees are key to that success and try to reward those employees.

If a company is successful, and the manager responds by cutting employee pay ... well, that's just being scumtastic.

Good heavens James H. Spea... (Below threshold)
DJ Drummond:

Good heavens James H. Speaking for accountants everywhere, you're pretty clueless about how companies really work!

First off, managers don't get to choose how much employees get paid at major companies, that's done by HR. I say that with 28 years experience as a manager.

As for pay cuts, in my experience that never happens except when a company is facing severe risk of failure. Are you seriously saying bankruptcy is better than reducing pay so you can stay in operation?

And, if by some odd chance you can find a company which has cut pay just because it feels like doing so, there's nothing that keeps the employees from looking for better jobs elsewhere.

Can't speak for planet James, but here on Earth that's how we roll.

"'they have a great deal of... (Below threshold)
boqueronman:

"'they have a great deal of incentive to engage in suspect or anticompetitive behavior."

That's generally fiction. Competitors and new entrants to the industry always adapt and innovate, making the advantage short-lived."

No, it's not generally fiction. We live in a Corporate State. While this is not an indictment of "capitalism," it is a term which addresses the lobbyist influence on all levels of government. Most of the number and funding of these lobbyists comes from industry groups or corporations.

What the business lobbyist seeks is to gain protected markets, which means effectively protection from competition. Yes, some subsidies and regulations can be overcome by the natural dynamic of new technologies and business models which escape any restrictions. But the real killer to a dynamic, growing economy is the manipulation of government to legislate barriers to entry. The smothering of competition - remember start-ups don't have the resources to compete in the lobbying arena - will result in long and costly battles, especially for the consumer.

Even free market advocates must realize that with an activist regulatory government to "capture" and use as a weapon, the big fish will be more than happy to eat the little minnows, to the detriment of society as a whole. To be clear, this problem arises because the government is too big and intrusive and is ready, willing and able to be "captured" and misused.

Nice polemic, boqueronman. ... (Below threshold)
Captain Reality:

Nice polemic, boqueronman. Totally devoid of fact or support, but I'm sure you find it believable.

Does your shift manager at Mickey D's know you slipped out to post? Those fries won't cook themselves!

Ahem. I'm thinking of the ... (Below threshold)
James H:

Ahem. I'm thinking of the Mott's plant in particular. Jay Tea posted it a few months back. It's worth reading.

Good heavens James H. Speaking for accountants everywhere, you're pretty clueless about how companies really work!

Not a clueless as you may think, DJ. I find that companies function poorly when they fail to listen to their lawyers. But that's another story, and not really the issue here.

The problem, IMO, is that if an otherwise healthy company feels like it can squeeze out a little more profit by slashing wages, there's very little stopping it.

Yes, individual workers have the ability to seek higher wages elsewhere. But in the absence of some form of collective bargaining, an individual worker lacks the same leverage that an employer has.

Are you seriously saying bankruptcy is better than reducing pay so you can stay in operation?

Absolutely not. But there are good ways and bad ways to do all of that. Have you followed the print media (as a business) for the past several years? Take a gander at Gannett. I don't begrudge Craig Dubow getting a good chunk of change for running the company. But he's been getting sizable bonuses at the same time the company's cutting workers left and right. I don't know how things work on Planet DJ, but on Planet Earth, that kind of thing erodes employee morale.

I contrast that with Southwest, where the company understood it needed to trim wages, then negotiated a specific deal with the union to do so ... and by doing that, it preserved company morale.

At my end, I've seen friends and family members deal with companies (admittedly poorly managed) that would screw them over in a heartbeat if they could get away with it. That's part of the reason I'm a bit more sympathetic to the little guy here than I might otherwise be. DJ -- shoot me an email. I'd like to share a couple stories with you.

I'm a little cockroach, wai... (Below threshold)
warchild:

I'm a little cockroach, waiting for the hammer ...

There are so many myths ban... (Below threshold)
Jeff Blogworthy:

There are so many myths bandied about in this thread it is impossible to tackle them all. It just goes to show how successful generations of anti-capitalist propaganda has been. Even conservatives buy into the lies. That's because they have been repeated thousands of times. For those who care enough to read, DiLorenzo debunks the string of union myths here:

http://mises.org/freemarket_detail.aspx?control=511

To get the full story, one must read some good books by free-market economists. You won't hear it anywhere else, that's for sure. DiLorenzo's "How Capitalism Saved America" is excellent. And Sowell has a good one out, Basic Economics.

You still miss the main poi... (Below threshold)
DJ Drummond:

You still miss the main points, James. You cherry-pick a few bad apples and pretend they represent the whole. The evidence goes the other way. You pretend that companies look for excuses to slash wages, forgetting that they know this would make them less competitive, not more.

And you also have driven into a few trees because you missed the forest. You brought up print media. OK, let's look there. Gannet is off the cliff, it's just a question of how long they fal before they hit the ground.

Now why is that? Ultimately, when one looks back to, say, 1950, when newspapers were pretty much at their peak as an industry, and 2011, over that six-decade stretch, three major things have happened:

1. News is now available by a wide range of mediums, and for all practical purposes is instantaneous. Newspapers are not considered anywhere near the fastest or most in-depth resource;

2. The cost of a newspaper subscription has risen to the point where a month costs more than a cell phone bill or economy-level internet. It is no longer a cost-effective medium;

3. Newspapers have lost all semblence of objectivity. What used to be limited to the editorial pages is now sold as fact to a public which not only recognizes the deceit, but which is demographically inverse to most print journalists in ideology. Newspapers have abandoned their competitive advantage and forgotten their consumer base.

Any one of these trends could be damaging, but collectively they are forcing the entire industry to reform or die. That is a topic worth its own debate, but for here it is critical to observe that management philosophy and wage policy are not material to the cause of the problem. Your point fails because you blame a symptom and miss the broader picture.

One of the most ridiculous ... (Below threshold)
Jeff Blogworthy:

One of the most ridiculous myths is that unions have made for safer work places. No, innovative technology produced by capitalists and inventors did that. If anything, unions make the workplace more dangerous because of leftist luddism and fretting over "lost jobs" due to technology.

Take Obama's ATM example. ATMs protect humans from workplace hazards, like robbery. More ATMs mean fewer cashiers get robbed, making people safer. Leftists want humans taking those bullets.

Remote and robotic cameras mean dangerous confined spaces can be explored without humans. The neo-Luddites would smash those too.

Heavy equipment saves vast amounts of human labor, protecting backs and keeping more workers out of dangerous excavations. But if we get rid of them, we could employ 50 workers with picks and shovels to do the same job much slower and less safely.

How about forklifts...

See how ludicrous the proposition is?

This collusion business is ... (Below threshold)
Jeff Blogworthy:

This collusion business is also a red herring. You want to know who the most ruthless, cold, monstrous, destructive price-fixer in history is? The state. There is no close second.

DJ:On my drive hom... (Below threshold)
James H :

DJ:

On my drive home from work, I thought over some of my biases, and I figured out why I seem so dead-set on believing businesses are, if not evil, than rather venal.

A large chunk of it has to do with my work. As I've alluded to elsewhere, I work for a law firm that typically represents business clients. By the time I come into a business (typically the other side), I'm already seeing the ill. Not the worst of what business has to offer (that would be silly and melodramatic), but rather the ore prosaic bits in which a particular business acts with ill intent. And let's face it, once one or more businesses bring in the lawyers, somebody's not exactly behaving on the up and up.

So, I do need to concede my bias. Businesses pay the fees that underwrite my paycheck, but I've also had an up close and personal look at the warts (because, let's face it, warts are what a lawyer sees), and it colors my perceptions.

I look to any company, any set of rules, any set of laws, any situation, really, I see how a company might behave unethically. And I do so because in the world I move in, in much of the media I consume (regarding court cases), the players, corporate and otherwise, do indeed behave badly.

I agree we all have to deal... (Below threshold)
DJ Drummond:

I agree we all have to deal with personal bias, James. What I find most effective is to step back and look for first causes.

You said that a company might behave unethically. That implies that a company, as a whole, would make moral choices and act both tacticaly and strategically according to its nature. I disagree with that assumption, however. In the end, it always comes down to specific people who make moral decisions.

Look at the Enron example, for an obvious case. Consider that the fraud was permitted to continue as long as it did, because the external auditors were complicit in hiding it. But the original Arthur Andersen, who founded his famous accounting firm, was best known for perfect integrity. Stories were told about clients he had turned down, or turned in, rather than assist them in unethical behavior. Yet the auditors from AA were a major factor in letting Enron play its shell game with the special-purpose entities. As with Enron, at AA it came down to certain individuals who ruined the company and hurt thousands of innocent people.

As a manager, I have usually been in the middle of things, charged with carrying out company policy on the one hand, and supporting my team on the other. Conflicts are commonplace, but in all my career I have seen many spectacularly dishonest and honest people, but few companies which I could say were wholly rotten or completely pure. And where that was the case, it was always single-owner businesses.

Corporations may seem to be unfeeling, greedy entities, but that is just a spin played by people who target them and imagine they can get money for themselves that way. The good and bad done at any company, private or public, is done by individuals, and so for good or ill, laws to control fraud and catch criminals must focus on individuals, not corporations. Most regulation misses that fact.

As an accounting professional, I have annoyed a lot of people by supporting Sarbanes-Oxley, but that law does two essential things I find effective. One, it requires specific audit procedures, not only under statute but through documentation of internal controls. And two, it holds the Chief officers of public corporations personally responsible for the material truth and integrity of their operations.

But regulation for its own sake is not only a fetish rather than sound judgment, it reduces business performance and, like it or not, the costs of regulation always come down to lower pay for floor-level employees and fewer full-time employees hired.

"Business Simplified for Id... (Below threshold)
Sep14:

"Business Simplified for Idiots"


Still way above Barry's pay grade.

Terrific discussion. My con... (Below threshold)
Ken in Camarillo:

Terrific discussion. My contribution is an opinion of what constitutes "good regulation" without wrecking businesses. Though some other methods of regulation are sometimes necessary, regulation should be kept in the category of "truth in labeling" to the extent possible. This supplies information so customers can make informed decisions in the marketplace, and theoretically it shouldn't be hard for a company to put out information it already has in the course of running its operations.

DJ:I think we've i... (Below threshold)
James H :

DJ:

I think we've identified our central conflict about how businesses really work.

You're a manager dealing with the day in and day out operations. You handle the routine and non-routine matters as a matter of course. To you, a "normal business" is one that, well, handles its business.

Meanwhile, I'm a lawyer. By the time I see a particular business, somebody on one side or the other has already screwed something up royally. And in a place like that, that screw-up doesn't occur in isolation. To me, a "normal business" is one that has a culture of screwing up something and needing a lawyer.

Like you, I do try to look for first causes. Once I set aside my lawyerly bias, I find myself thinking that businessfolk aren't necessarily good nor evil, but that they are looking to maximize profit. In isolation That's neither good nor evil. It's part of their nature.

The next "first cause" I can determine is to look at market incentives. Why did Xerox improperly recognize revenue in 1997, 1998, and 1999? Why did Worldcom improperly capitalize its assets from 1999 to 2002?

Partly because the folks involved were schmucks. But I would also argue that compensation systems and the modern investment situation both created incentives for their bad behavior. When executives are compensated in options, they have an incentive to maximize stock value rather than to maximize the company's long-term profit. Similarly, the focus on quarterly reports creates an incentive for employees to sell hard by the close of the quarter (OK) or to manipulate their earnings in some way (not OK).

Worldcom, Xerox, and Enron may be outliers, but their employees behaved the way they did for a reason. And in terms of regulation, I prefer to remove those incentives for bad behavior as much as possible. While I understand businessfolk's hostility to certain regulations, SOX among them, I also can't simply say "oh yeah, you're right!" every time the business community objects to a particular regulation.

I once knew a former corporate counsel who had a personal policy. He told me that whenever a company employee came to him with a dodgy scheme of some sort, he would advise them to the effect that it was a dodgy scheme and possibly illegal. Then he would go to his office and write a memorandum: "X requested advice today regarding a dodgy scheme that is possibly illegal. Advised X that it is dodgy and possibly illegal."

When we start talking things like basic antitrust laws, accounting regulations, and so forth, I keep returning to human nature and incentives. Even if they're not necessarily evil, the owners of two or more businesses in a market can work together to make it impossible for a new competitor to enter the marketplace. They might work together to set prices on certain goods.

This may not be "evil" in a sense but it is anticompetitive. As a Cylon might say, it has happened before and it will happen again. And I don't see any reason to allow businessfolk to act in a way that blatantly harms competitors or competition. I want them to have significant disincentives.

DJ, I have no doubt you will argue that this kind of behavior is that of statistical outliers. But I argue in turn that yes, it does happen. And yes, it must be stopped.

Many flaws. Just to highli... (Below threshold)
Oldflyer:

Many flaws. Just to highlight one; i.e. the idea that money saved does not benefit the economy. What does the author think that the Savings institution of whatever type does with the deposited savings? So that they can pay interest to the saver and pay their own expenses, they obviously invest the money, which eventually ends up as Capital investment to fund new or expanded enterprises. Savings are not bad for the economy. They are good, assuming that they are not saved in the proverbial buried tin can.

PSIf James H judges ... (Below threshold)
Oldflyer:

PS
If James H judges the world by the view from a Law firm, he needs to reconsider. Has it occurred, that when law firms get involved it is because there is a problem; and that the vast majority of companies do not get involved in litigation or with the government? In fact I might venture that those who do have one over-riding characteristic. It is not malfeasance, so much as deep pockets, that make them the targets of law firms.

Please don't ask us to accept your badly skewed view as the norm.

Simplistic, Randian. You i... (Below threshold)
Chico:

Simplistic, Randian. You ignore the role of government in providing security and enforcing contracts. The corporation itself as a contract and a legal "person" depends on its survival on rules which prevent majority shareholders from insider transactions which loot it of assets, to the detriment of minority investors. Without such rules, the aggregation of capital does not happen, because nobody trusts corporate governance.

This is one reason why weak states like Iraq are at the bottom of the World Bank's Ease of Doing Business rankings - no protection for investors.

Then there is the other aspect of legal protection to nations, which recognizes that the corporation has no other duty than to maximize shareholder return and if left unchecked by law or conscience will sacrifice wages, the environment and other national interests in pursuit of shareholder return. You can't rely on managerial or shareholder conscience, so law is the only real check.

Speaking of simplistic, Chi... (Below threshold)
Oldflyer:

Speaking of simplistic, Chico. You said corporations "...if left unchecked by law or conscience will sacrifice wages, the environment and other national interests in pursuit of shareholder return. You can't rely on managerial or shareholder conscience, so law is the only real check."

For starters, I doubt that anyone questions the government's role in security, or in enforcing laws against fraud, theft, environmental desecration, etc. Most just want government's role to be carefully monitored and controlled to its legitimate functions. But, your statement, quoted in part above, is utterly simplistic on its face. There are multiple restraints on corporations. Most of them are embodied in what we call "free market competition". Surprising how well that works. On the other hand, when government gets overly involved, another players rear theirs ugly heads and distort everything; one such player has become known as "crony capitalism". When government is unrestrained, it gives and takes according to its own agenda. But, when government gives, we know it is the taxpayer who pays the cost.

James,Reading the ... (Below threshold)
Kenny:

James,

Reading the NY Times article you linked to about the Motts example, you have a company who is paying their employees on average 50% more than other companies in the area for the same work. The company is asking for a cut of 7%, still making their employees higher paid, on average, than the workers in the area. Truly an evil comapny.

I congratulate you for recognizing and acknowledging your bias against businesses.

Just heard Bachman say she ... (Below threshold)
Jeff Blogworthy:

Just heard Bachman say she brings von Mises to the beach. Now that's my kind of gal! Very good sign.

OLdflyer: "Many flaws. ... (Below threshold)
DJ Drummond:

OLdflyer: "Many flaws. Just to highlight one; i.e. the idea that money saved does not benefit the economy. What does the author think that the Savings institution of whatever type does with the deposited savings"

If you directed that at me, Oldflyer, please consider that money put into a bank is also a transaction by a company, and therefore motion of money just as I said is necessary. As to the bank, you yourself said it issues loans, which are transactions which further move money, again just as I said.

James, I will answer your last after I finish running some errands I have. More 'money in motion', come to that.

James H: "To you, a "nor... (Below threshold)
DJ Drummond:

James H: "To you, a "normal business" is one that, well, handles its business.

To me, a "normal business" is one that has a culture of screwing up something and needing a lawyer.

Like you, I do try to look for first causes."

OK, let's work from there. Businesses have to make money to exist, even non-profits have to pay for their employees and supplies. We should also be able to agree that, in general, freedom ends at the point where doing what you want takes away from someone else's freedom. This is the basic moral argument against fraud and corrupt trade, right? The government has a vested interest in successful business, because corporate and personal income taxes depend on financial success. As a result, any consideration of government action needs to consider, of primary importance, the net effect of its actions. I will come back to that, but wanted to set that out here.

James: "The next "first cause" I can determine is to look at market incentives. Why did Xerox improperly recognize revenue in 1997, 1998, and 1999? Why did Worldcom improperly capitalize its assets from 1999 to 2002?"

The mistake you make there, I have already pointed out. You are cherry-picking single instances, and ignoring the literally thousands of U.S. corporations which did NOT attempt to deceive shareholders or the government. Also, I note that you blame the companies themselves, rather than blame on the actual individuals who committed the acts. In the case of Xerox, the mistake was timing. Paul Allaire, G. Richard Thoman, and Barry D. Romeril were the principals who directed Xerox's finance group to ignore GAAP and recognize lease earnings when the contracts were signed, rather than when the money was actually received. In the Xerox case, it was simple enough to see who was behind the crime, because those specific executives profited from the action, while other Xerox execs did not manipulate stock sales to take advantage of the trick, even though the fraud occurred over a 4-year period.

As for Worldcom, again a few people managed to destroy a successful enterprise gthrough personal greed. While Sarbanes-Oxley was designed in part to respond to the Worldcom debacle, the actions of Bernard Ebbers, who dominated the crimes, were already illegal and led to a 25-year prison sentence, along with heavy fines. Ebbers was able to bully Scott Sullivan and David Myers (the CFO and Controler) into going along with declaring false intangible assets and capitalized expenses. It's important to note that at both Xerox and Worldcom, accountants discovered the fraud early on, and under Sarbanes-Oxley provisions the crimes would not have been covered up.

James: "I would also argue that compensation systems and the modern investment situation both created incentives for their bad behavior."

I disagree. I'm old enough to rememver all the self-righteous demands that executives not receive bonuses in cash, but should receive stock and stock options. Well, that demand was answered. Most executives but for the long-term, cashing out only after they leave the company. Again, you are focusing on the outliers, not the general behavior.

James: "I argue ... that it does happen. And yes, it must be stopped."

Police would love a 0.00% crime rate, but that's never happened and never will in this world. This brings me back to net effect, the simple but difficult quesiton of what, overall, is the cost and benefit of an action taken. Regulation is by nature punative and parasitical, so we have to consider whether things, in general, are made better or worse by a possible step.

Law must develope because criminals innovate the same way that any other human demographic learns and adapts. It's important to realize that this means that some old regulations and rules no longer have relevance and produce no benefit for their cost, and the sheer weight of so many laws and regulations weighs down businesses for no good purpose. This is one reason I am extremely leer of political leaders who have no direct connection to real business.

Simplicity, personal accountability, consistency, and cooperation with all stakeholders are the four criticial requirements that must precede any new regulation, if it is to be effective and worth implementation. In other words, make sure it helps, makes sure again that it won't have 'unintended consequences', and government must never impose unilateral burdens on business.

The mistake you ma... (Below threshold)
James H:
The mistake you make there, I have already pointed out. You are cherry-picking single instances, and ignoring the literally thousands of U.S. corporations which did NOT attempt to deceive shareholders or the government.

You mistake my intent, DJ. I am not trying to cherry-pick the bad businesses and assume other businesses are equally bad. Rather, I assume that most business are good actors, and that attention needs to be paid to these outliers. And as part of that, one must inquire ... why did these outliers do what they did?

DJ: Let's take an example.... (Below threshold)
James H:

DJ: Let's take an example. Setting aside Dodd-Frank, what kind of regulations/laws would you have put forward after the mortgage-related meltdown?

Let's assume for the sake of argument that we're going to shut down Fannie and Freddie. A few years ago, I would have opposed that, but I've concluded that they do more harm than good.

I'd tear down the house and... (Below threshold)
DJ Drummond:

I'd tear down the house and rebuild, James. Congress screwed the pooch by trying to compel banks to accept high-risk loans just so low-income folks could buy houses. Before 1995, most folks bought homes under very specific conditions, and part of that - a very important part - was that risk was tied to decision control. The ability to approve the loan belonged to whomever took on the risk. Most home loans have very little collateral besides the house itself, so a significant down payment is necessary to show the buyer is serious about the commitment. Folks forget that Congress changed the rules about home loans, in order to allow little or no down payment, to prohibit traditional risk assessment tools, and to transfer risk from the buyers and banks to the federal government.

It was an incredbily stupid thing to do, and many bank and risk professionals said so at the time. They were called 'racist' for bringing up very legitimate warnings.

A house has no value, except for four things; the location and size of the property, the quality and condition of the structure, the demographic trends at the time of sale, and public confidence in homes overall. That is, no one wants to buy a home in a bad neighborhood, in bad condition, one they cannot afford, or one they believe will decrease in value.

Congress should condemn all their colleagues who wrecked a sound system that worked fine for over a century, then leave the industry alone and go play with something that hurts people less when they break it. There is no constituionality for government to interfere with the commerce of house sales, and every reason to refuse to let them mess with it again.

Regarding outliers James, g... (Below threshold)
DJ Drummond:

Regarding outliers James, go back and see the definition. There is always a fringe element in human behavior, which acts out of true. You make policy to address the mean condition, not the outlier.




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