Save the Automakers?

Throughout the course of the last 300 years, manufacturers have always been susceptible to the force the economist Joseph Schumpeter called creative destruction. What Schumpeter was talking about was the idea that new and better methods replace old and worn out methods of production. Essentially someone figures how to build things better, faster and cheaper. Those companies that cannot adapt get clobbered by competition.

Creative destruction is great for society. Think of it as a cleansing forest fire. Methods that waste precious resources and capital are replaced by efficient means of production. Companies that create products that society no longer values are also victims of creative destruction. Shortly it will be impossible to get a CRT TV. Why? Because people no longer value that technology and prefer the flat screens of Plasma and LCD. Fortunately it also happen with the 8-track tape.

So the real question is then, are the Big 3 really victims of creative destruction? It looks to me like they are. They are manufacturing products that people do not seem to want like big SUVs and trucks. They have employed billions in capital to make those products that no longer have a market suitable to make a profit. Maybe its the wage structure (argued that it is way to high to make cheap, fuel efficient cars), maybe it is the product mix (poor management and strategy) or maybe it better competition that is driving the Big 3 out of business. What ever the cause, they are wasting capital. The solution is not to through more capital at them hoping they will get better. It won't. Saving the Big 3 is like saving the cathode ray tube television or the 8-track tape.

Certainly jobs will be lost in the areas where GM, Ford and Chrysler operate. However preserving those jobs means that other people will not get access to the capital that would create new industries and sectors where American companies can be competitive in the global market. Furthermore, bankruptcy might be the best thing for the already deployed capital in Detroit. Reorganiztion would allow someone else to buy those assets for a market price that just might mean they could make a profit. Bankruptcy does not make assets vaporize. Just look at the airline industry. They have gone bankrupt dozens of times and the planes are all still there.

Two must read blog posts:

Megan McCardle

Carpe Diem