Big 3 failure would spell doom for U.S.
John Thomas
Issue date: 12/3/08 Section: Commentary
In 1890, economist Alfred Marshall presented a view of the lifecycle of firms in his Principles of Economics. He compared firms to trees in a forest with younger trees struggling upwards through the shade of the larger, older trees. The trees that grow tall become stronger as they have uninhibited access to sunlight, but after a while, "age tells on them all. Though the taller ones have a better access to light and air than their rivals, they gradually lose vitality; and one after another they give place to others, which though of less material strength, have on their side the vigor of youth." Through this mechanism, the economy is constantly being refreshed; the old replaced by the new, the tired replaced by the energetic, the meandering replaced by the dynamic, the complacent replaced by the innovative. We owe a great deal of our prosperity to this feature of the free market system.
The CEOs of GM, Chrysler, and Ford are making the case that their firms are too big to fail. Bigness, however, should not translate into permanence. In "Marshall's Trees and the Global Forest: Were Giant Redwoods Different," Leslie Hannah found the data to back up Marshall's analogy: of the 100 largest firms in 1912, only nineteen were still in the top 100 in 1995, and 48 disappeared as independent entities. Large firms have failed before, and our economy, for the most part, has been better for it.
The not-so-Big Three deserve to be here as a result of mismanagement and labor greed. Poorly run companies ought to fail. Their failure clears the way for better run companies to succeed and frees up capital for more productive uses. Throwing money at money-losing enterprises - GM is losing about one billion dollars per month - is a fool's errand. As much as I would like to see the market discipline these firms for their failure to compete, we are in a recession that is likely to be deep and allowing one of the cylinders of our nation's economic engine to cease firing would likely have disastrous consequences.
The CEOs of GM, Chrysler, and Ford are making the case that their firms are too big to fail. Bigness, however, should not translate into permanence. In "Marshall's Trees and the Global Forest: Were Giant Redwoods Different," Leslie Hannah found the data to back up Marshall's analogy: of the 100 largest firms in 1912, only nineteen were still in the top 100 in 1995, and 48 disappeared as independent entities. Large firms have failed before, and our economy, for the most part, has been better for it.
The not-so-Big Three deserve to be here as a result of mismanagement and labor greed. Poorly run companies ought to fail. Their failure clears the way for better run companies to succeed and frees up capital for more productive uses. Throwing money at money-losing enterprises - GM is losing about one billion dollars per month - is a fool's errand. As much as I would like to see the market discipline these firms for their failure to compete, we are in a recession that is likely to be deep and allowing one of the cylinders of our nation's economic engine to cease firing would likely have disastrous consequences.
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