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Source link: http://archive.mises.org/10066/general-motors-rip/

GENERAL MOTORS, RIP

June 3, 2009 by

General Motors was once not only the world’s greatest and most prosperous automobile company but the world’s greatest and most prosperous manufacturing company, indeed, the world’s greatest and most prosperous company of any kind. Its success, wealth, and economic power, were symbolic of the success, wealth, and economic power of the United States.

General Motors has now perished, brought down by a kind of philosophical and economic tapeworm that consumed the company from within. The economic tapeworm was the United Automobile Workers union, which transformed the company into a carcass upon which it could feed while tying GM’s hands and feet with arbitrary work rules that prevented it from competing and providing any addition to what was to be consumed by the UAW’s vultures. The philosophical tapeworm lay within the minds of those running the company. For decades, it led them never to take a stand on principle and forcefully resist the UAW. Always the present cost of a major strike was allowed to outweigh the prospect of the ultimate destruction of the company, which was never considered fully real because it lay in the future.

In its last years, the company was reduced to the status of a “benefits” company, a company existing primarily for the purpose of paying the pensions, medical benefits, and exorbitant wages of the UAW members. In its last year, the company was reduced to the status of a beggar-benefits company, as it repeatedly turned to the Federal government for the billions of dollars that were needed to keep it in existence for just the next few months, in the hope that in that time a miracle would appear that would allow it to survive.

Now the company is gone, along with the billions of dollars of “bailout” money needlessly spent to “rescue” it. It would have been far simpler not to have given any bailout money and to have allowed the bankruptcy to occur last fall. That would not only have saved billions of dollars, but it would have avoided the United States Government becoming the major stockholder in the company that will control many or most of the remaining assets of GM.

General Motors was destroyed by operating under the ignorance, stupidity, and irrational greed of a labor union. From this point on, it is to operate under the ignorance, stupidity, and irrational greed of government officials acting in combination with that same labor union. It will survive only if fresh billions continue to be thrown at it. It if survives, instead of being a source of wealth, it will be a continuing drain of wealth.

What has happened to General Motors is symbolic of what is happening to the United States. The United States is being destroyed economically and culturally by irrational theories and policies. The standard of living of its people is falling. Government officials are preparing to accelerate the fall by means of the imposition of insane policies designed to curtail energy consumption and roll back the production of wealth. The American people have elected a President who has expressed regret that the Supreme Court “never entered into the issues of redistribution of wealth” because it “didn’t break free from the essential constraints that were placed by the Founding Fathers in the Constitution.”

If a company as great and as economically powerful as General Motors once was can collapse into a shadow of its former self, so too can every other company in the United States. So too can the United States itself.

Copyright © 2009, by George Reisman. George Reisman, Ph.D. is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics. He is also a Senior Fellow at the Goldwater Institute. His web site is www.capitalism.net and his blog is www.georgereisman.com/blog/. A pdf replica of his book can be downloaded to the reader’s hard drive simply by clicking on the book’s title, above, and then saving the file when it appears on the screen.

{ 39 comments }

Magnus June 3, 2009 at 3:28 pm

Amtrak, meet Amcar.

Joseph Mises June 3, 2009 at 4:03 pm

Why is the “copyright’ there?

Eric Parks June 3, 2009 at 4:33 pm

It wasn’t just the unions, which they were all for so that their competitors couldn’t afford same, but also their mercantilist ways. For example, GM hid behind the Senator Homer Ferguson when the Tucker Torpedo came a’calling.

The question shouldn’t be “Why are the “Big three” are failing.” The question should be “Why are there only three car companies in this country?”

brad maynard June 3, 2009 at 7:33 pm

remember way back when there was such an outrage against people that drove imports, so much so that cars not NA made were being torched in detroit. personally i think this actually helped the perception that the Detroit Three were too big to fail because it seemed that the PR campaign against foreign cars insulated both the unions and the automakers from the continuing improvements in quality, efficiency, and prices that was taking place overseas. right now our CAW here in ontario is doing what it can just to stay relevant. their political capital with the public and our conservative government has been squandered by all the years of greed and whining. i wont buy a GM now just on principal alone. (owned 5 pontiacs)

Ryan June 3, 2009 at 7:35 pm

“Why is the “copyright’ there?”

My guess is Prof. Reisman has yet to read the book Against Intellectual Monopoly by Michele Boldrin and David Levine.

Gil June 3, 2009 at 7:45 pm

A good argument to outlaw trade unions?

Nuke Gray June 3, 2009 at 8:04 pm

Still, when the DinoSaurons died out, that left room for mammals to take over. The age of the Electric car is here, an age of light and good stuff. Rejoice! Rejoice!
Whilst unions shouldn’t be banned, since forbidden things have glamour, they shouldn’t be allowed to monopolise labour, either. That is the flaw in their philosophy. Why shouldn’t workers have a choice of unions, just like choosing cars? (That’s a major flaw here in Australia- monopoly unions)

Bob D June 3, 2009 at 8:15 pm

I think the copyright is there so that others may use it but not sell it. Isn’t that what Lew Rockwell advocates. Just a guess.

Sri Hari June 3, 2009 at 8:24 pm

What if GM produced cars the market demanded? What if GM did not discount and not create an artificial production boom at the factory, which led to further discount to move stock?
GM board signed cheques no the union, if cars were not produced and plants idled, union could have gone on strike for ever and it would not have mattered.
The reality is GM had a incompetent, spineless management-the union took advantage of it. Suffer all!!

JD June 3, 2009 at 9:41 pm

Central Bank allowing unnatural credit for people to buy vehicles they can’t afford probably had something to do with it as well.

I agree the unions were a overwhelming weight on them (Welfare State), and coupled with a crippling/fradulent economic system, it was only a matter of time.

J. Tucker’s aritcle regarding the the Romanian car maker telling of the ill effects of State Control, gives an insight into another problem, regarding non car folks ignorance of automobile engineering.

The problem I see largely, is that people have this Utopianesque vision that something is out there better, cleaner, more Holier than Heaven itself…and they jump on bandwagons blindly, many with agendas that give way to coercion by governmental entiites they create. Part of it, IMO stems from the hip enviormental movement that promises utopia and demonizes current realistic progress. Most of it is false-theory with no real economic reason. Unfortuneatley, many educated people fall for this nonsense. They don’t even remotely understand the limitations of engineering, and don’t care, because they believe the State can force technological progress and make it happen. Too many rich socialist with the State behind them. People are constantly looking for some revolution in a certain sector they may be years away, or just plain will never able to be a reality. The world is a trade off, so these Berkestocker Babies need to bite their false pride, and grow up.

I’m sick of certain cars being demonized, SUV’s, pickups, Hot-Rods, etc. They are simply a engineering function with a designated purpose, nothing more. Hot Rodding, which I am into as a hobby, will give folks a better understanding of the automobile. It will humble you greatly. Most folks don’t understand the Combustion Engine is still an air pump, with limitations, just like any other power source. Short of advancements in Fuel Deliver, Tuned Port FI, and current Direct Port FI things are still the same beneath the intake and heads. Sorry, but thats the way it is.

I always question the upper ups lobbying, to curb out competition, but the UAW was definteatley a Death Blow for the U.S. companies. Even though entry into this industry is exhobinantly expensive, hopefully in an Austrian Eco. world someone could’ve come in to compete and deliver to the consumer.

Max Headroom June 3, 2009 at 10:34 pm

GM is not dead yet. Obama is wedded to GM and the failure of GM would be a huge Obama failure. Not going to happen.

Jay Greathouse June 4, 2009 at 12:04 am

What I take away from this is that big is bad. Big Business, Big Labor, Big Government; all gone bad. I no longer believe power corrupts but rather that only the corrupt seek power. The drive to run these huge social power structures are evidence of pathology. Today we live in a pathocracy beyond redemption.

To exempt GM while bitch-slapping labor and government seems at best a bit myoptic to me, but everyone has their blindspot it seems.

BTW, the little gray rectangle at the bottom of the page, the Creative Commons badge, preserves authorship. The copyright fetish merely signifies old-school paranoid acedemic strutting.

Mac June 4, 2009 at 3:32 am

Oh, how far GM has come. As a sidebar:

Alfred P. Sloan, who turned GM into a behemoth was, at times, a proto-Austrian. He called the New Deal a “Raw Deal.” He thought the New Dealers were “despots.” And he ran into direct conflict with FDR, Secretary of Labor Frances Perkins, and labor leader John L. Lewis.

Sloan was also the first who put into place concepts like market segmentation, decentralization, and productivity/efficiency control. Ironically, the same techniques that would generate the huge amounts of wealth that the unions could leech off of. And not just for GM; these concepts were imitated successfully by scores of other companies and put into the books as central ideas. The application of these ideas exploded the productivity of workers and satisfaction of consumers.

All these ideas are still relevant, and I run across them regularly in books by Austrians. So don’t pine for GM. They ignore these ideas at their own peril.

This experiment is going to fail, even though it will take some time before it does. In the meantime, some new capitalist company, with its own Sloan-type, will find a way using these ideas; probably with an electric car or some other version that will appeal to customers and it will start succeeding. When it does, what will the unions do? Why, they’ll have to unionize it, because it harms the workers at GM. That worries me more.

Cheers

Inquisitor June 4, 2009 at 4:19 am

Professor Reisman is not against copyright at any rate, whatever his use of the symbol might mean.

Becky June 4, 2009 at 6:13 am

So according to the moron who wrote this article the Union is to blame for everything? What about the mismanagement by the top brass? Or the millions in bonuses from money to stock in the company, to paid for company cars, paid to the same unqualified top brass that mismanaged the company in the first place? The Union is by far not perfect but without them how many more people would be jobless right now?

low warranty June 4, 2009 at 7:54 am

I put equal blame on management, government, and union employees. Union employees for using coercion and violence. Government for inflating the money supply and then rigging the inflation statistics so that long term liabilities could not be calculated properly by anyone. Government for also constantly increasing the regulatory burden on the industry. And finally, management for not understanding, or willfully ignoring these factors.

Grant June 4, 2009 at 8:01 am

“The Union is by far not perfect but without them how many more people would be jobless right now?”

Without the union, fewer people would be jobless. That’s what things like government enforced monopolies (in this case on labor) and wage floors cause. Are you sure you’re on the right website?

Alvaro June 4, 2009 at 8:16 am

“The Union is by far not perfect but without them how many more people would be jobless right now?”

None: the company is bankrupt and soon they will all be jobless.

Ron June 4, 2009 at 10:08 am

“The Union is by far not perfect but without them how many more people would be jobless right now?”

As Grant said, the unions ensure that more people are jobless than otherwise would be. The very nature and purpose of a trade union is to drive up the wages and benefits of its members. In order to do so it must exclude others from being employed in the same field. If the supply of labor were allowed to increase its price would necessarily decrease, so unions must restrict the labor pool in order to keep labor prices artificially high. What’s interesting to note is that it works equally well coming from the other direction, as mandatory wage and benefits increases serve to restrict the labor pool on its own. The more union wages increase, the fewer workers a firm under union control can afford to employ. It’s a win-win for union workers, and a lose-lose for everyone else.

Jake June 4, 2009 at 11:01 am

To the moron who wrote this comment:

“The Union is by far not perfect but without them how many more people would be jobless right now?”

Less people would be jobless now.

1)Unions create barriers of entry with their minimum wage demands and thus a monopoly for their members.
2) Without unions, the market would be able to adjust wages according to economic conditions. Instead of negotiating lower wages, benefits etc., companies now have to cut jobs to adjust their costs.

Duh…

Michael A. Clem June 4, 2009 at 11:14 am

Becky, I hope you came back to read Ron’s response about unions. The problem isn’t that unions exist, but that they have the power to disrupt voluntary employer-employee relations. It’s this coercive power that is morally wrong and economically damaging, and as Ron explains, there are economically valid reasons why this is the case. The economy can be diverted, but not without consequence–economic laws cannot be violated any more than physical laws can be.

David C June 4, 2009 at 11:20 am

The exit strategy for people stuck with GM was to go to Toyota or Honda before it was too late, but I don’t know what the exit strategy for the USA is. Only a tiny number of countries are more free, and most of those are tourism banking based and very vulnerable to being pushed around by the big statist countries.

PS: don’t forget the tariffs. Technically speaking, we didn’t have tariffs we had “informal agreements” to avoid a trade war, but in practice they acted like tariffs

Rack June 4, 2009 at 11:42 am

As GM goes so goes America! There goes our Freedom! Check out HR 45 Blair Holt Firearm Licensing & Record of Sales Act of 2009.

Is it 1984 yet?

Joel June 4, 2009 at 1:11 pm

As a few others have commented, I must take issue with the blame lying with GM’s unions. If GM management did a good job of supplying autos customers wanted, they would not be in this predicament today. Toyota makes autos in the US. They make autos people want. They have been busy improving quality and reducing costs for 30 years. They even deal with unions. They remain very successful.

Ron June 4, 2009 at 1:29 pm

Joel,

I don’t think anyone here believes that the blame for GM’s demise lies solely with the UAW. Management and the federal gov’t certainly share some of the responsibility. Just as we strive to debunk the myth of government-as-savior (from “unfettered Capitalism”), however, so must we work to destroy the fantasy that unions are somehow necessary for prosperity. The article focuses on the UAW, so it’s natural that the thread of the comments should do likewise.

(8?» June 4, 2009 at 3:18 pm

“The United States is being destroyed economically and culturally by irrational theories and policies.”

What is the “United States” but irrational theories and policies? Or any other state for that matter?

Silly statists. Seems they’re quite willing to watch the world self-destruct if they can blame a collective abstraction, all while never noting their own individual complicity of action.

Lee June 4, 2009 at 4:02 pm

I can’t wait until I get to own a government car! It’ll be the Yugo of our time! I always wanted a Yugo! Maybe I’ll get an Obama luxury sedan, with manual windows, no A/C, and fueled by love and open mindedness!

And even though I can’t even afford one, I’ll demonstrate that I have a NEED for one. Or better yet, I’ll get a job as a mid level bureaucrat and they’ll just send me one! YAY!

Ken June 4, 2009 at 4:26 pm

@Lee, now you’re just tryin’ to cheer me up. ;-)

Becky June 4, 2009 at 5:47 pm

Becky, what are you doing on Mises? Have you come here to make a fool of yourself? You’re one of the many “educated” masses that fall for this propagandized nonsense that JD mentioned earlier.

Without these unions, we would have saved billions and billions of taxpayer dollars instead of wasting it to benefit the few in the UAW.

This is about as valid of an argument for corn lobbyists. Sure, without corn lobbyists, a few people in Ohio would lose their jobs, but the rest of the country would save billions.

Now, let’s make it very simple, Becky. Repeat after me… Unions screw most people over! That’s it, it’s not very hard to understand!

Becky is dumb June 4, 2009 at 5:47 pm

Becky, what are you doing on Mises? Have you come here to make a fool of yourself? You’re one of the many “educated” masses that fall for this propagandized nonsense that JD mentioned earlier.

Without these unions, we would have saved billions and billions of taxpayer dollars instead of wasting it to benefit the few in the UAW.

This is about as valid of an argument for corn lobbyists. Sure, without corn lobbyists, a few people in Ohio would lose their jobs, but the rest of the country would save billions.

Now, let’s make it very simple, Becky. Repeat after me… Unions screw most people over! That’s it, it’s not very hard to understand!

John June 5, 2009 at 1:49 am

Perhaps the real reason for the demise of GM was that many of its products were unpopular. Of course the pension plans and workers wages cost a great amount to maintain, but when you consider that Japanese manufacturers pay a comparable amount to their workers in wages and benefits you are forced to confront the reality; GM failed because of poor management decisions.

Larry N. Martin June 5, 2009 at 8:32 am

Enough with dumping on Becky. Her attitude is a mainstream attitude held by millions of people. Calling her dumb and moronic won’t persuade her, or any other person with a similar attitude.

Tim L. June 5, 2009 at 11:59 am

John, while you’re all busy confronting reality, you might take a moment to observe the facts: GM’s total hourly labor costs are $69 and Toyota’s are $48 (from the article “GM Vs. Toyota Wages And Benefits” By The Associated Press December 12, 2008). I suppose you could say $69 and $48 are “comparable”, but then so are any two numbers. What’s important is that GM can’t compete with Toyota because GM’s labor costs are much higher, and the UAW is responsible for that.

Magnus June 5, 2009 at 12:15 pm

Perhaps the real reason for the demise of GM was that many of its products were unpopular. Of course the pension plans and workers wages cost a great amount to maintain, but when you consider that Japanese manufacturers pay a comparable amount to their workers in wages and benefits you are forced to confront the reality; GM failed because of poor management decisions.

In addition to the cost disparity that Tim mentioned, you must also consider the fact that nothing in economics occurs in a vacuum.

Poor business decisions are inevitable. It is only a matter of how many you make, how frequently you make them, how severe they are, and how long it takes you to realize your errors and correct them.

GM had excessive labor costs, imposed by government.

GM lacked flexibility in making business decisions, because of union control over its managerial decisions. That control was provided by government.

These basic facts reduced GM’s range of options. They made GM more desperate. They forced GM to play it safe. They forced GM to take fewer risks. They inhibited innovation. They made it harder for GM to close plants to save money, since plant-closures always came with huge, lingering costs. This meant that GM stuck with the old ways and locations when sound business judgment was indicating that changes should have been made.

As a result of these union-based pressures affecting every decision GM made, GM was more vulnerable to the effects of its bad business decisions. The unions reduced GM to the status of a company on life support.

If GM hadn’t been so ossified and hamstrung, it could have afforded to make a few bad products every now and then, and still recover.

Walt D. June 5, 2009 at 12:25 pm

While labor costs put GM at a disadvantage, this is not sufficient in and of itself to cause bankruptcy. This, and other myths, such as people want econoboxes and that the cars themselves are poor quality, mask the actual cause of the current problems – the collapse of the credit market. Prices have risen to such an extent that even if you subtract the labor differential, people can only buy or lease on credit. As Peter Schiff has said, “the American consumer is broke!”
Also, from a libertarian perspective, there is nothing per se wrong with the idea of a trade union. What is wrong is the government interference (coercion) and the corruption, such as using contributions for political contributions.

Eric H` June 5, 2009 at 12:31 pm

I’m halfway through Russ Robert’s The Choice: A Fable of Free Trade and Protectionism, a book made all the more poignant by GM’s slow-motion decline and iimplosion.

Chew on this pithy collection of factoids from the book:

“Economists estimated the effect on the price of an American car from the ‘voluntary’ restriction of Japanese imports to be at least $400 per car. In 1984, for example, that meant that consumers paid an extra $4 billion to American automakers and their workers because of a restriction on imports.” [emphasis mine]

I don’t know what $4 billion in 1984 dollars equates to in today’s dollars or real dollars. It’s one heck of a subsidy whichever way you cut it. And that $4 billion was given to them during one a period of abysmal quality in American cars, both in design and manufacture! Add that to almost 50 years of tariffs on imported trucks, and what you get is half a century of bailouts. The recent bailouts were merely a last-ditch infusion; the industry was bleeding out steadily for decades, as Reisman so colorfully illustrates!

s burgess kiwi in australia June 8, 2009 at 11:54 am

i worked in a meat works in aus one of the union deals in 2002 was to pay all workers more who were working for the company at that date up 2 140 per week.all workers after that date would have no chance of gaining the same rate me inclued it was called the grand father clauze.after a doggy vote in witch the line was slowed down i got every one to do a new vote when it was clear not many people were for it 20% for slower to 80% . i had a big arguement the the union rep over it.he tried to get a few guys to stand over me who he didnt know were my mates.yea i hate forced unions.my own country new zealand got rid of abertary union powers the union can be sacked ect.was called the indervidual employment contract act.i dont think a single government policy change has done more to reduce unemployment in the western world we a looking at highs of 5 or 6% from 3% this bust.

Elevic Pernis June 14, 2009 at 2:59 pm

Indeed, labor unions are economically destructive.

Stephen Houghton June 17, 2009 at 11:46 am

Several commenters on Dr. George Reisman’s recent post at the Mises Blog about the collapse of G.M. have been criticizing him for placing too much of the blame on the Unions and not enough on the company’s management. While I agree that management can’t be let off the hook, I think it is important to realize what an important role the Union’s played in the bad management of the companies they parasitized. As economically informed persons, the readers of the Mises blog ought not to need to be reminded of the importance of incentives. So let us look at the incentives that compulsory labor unionism gave the management of G.M. and the many other companies that they have sucked dry.

In a free market a company’s labor costs (in terms of money) are going to be set by the least efficient producer who is a purchaser of that particular type of labor. In the instance of a car company like G.M. it would compete with other car producers and the producers of motorcycles, trucks etc. for auto assembly line workers. (this is obviously a huge oversimplification of the types of labor, but it works for this discussion) In such a free market, the management of such a company has a huge incentive to increase the long term productivity of its workers. Since it only has to pay the wage set by the least productive company, all improvements in productivity (in money terms) goes to the shareholders, who are likely to award management for this increase in profits. (It should be noted that leading producers may well pay a premium to get the best workers, but that is only if it will lead to increased profits. It should also be noted that the workers will benefit from the increase in productivity due to the fall in the price of the products that they produce, the fall in prices being a result of the increased productivity.) In contrast under compulsory labor unionism, any long term increase in profits will be extorted by the union. (Remember S. Gompers famous dictum about the social responsibility of business being to raise profits. This had the obvious corollary of allowing the union to extort higher money wages.) Thus as long as it is not about to be driven out of business, a unionized business has little incentive to increase the long term productivity of its workers, because the benefit (in money terms) will go to the workers. This is also true of other long term strategies to increase profitability. If the increase in profitability lasts to the next contract negotiation, then the union will claim that the increased profitability justifies higher wages.

In a free market, business practices that increase profits in the short run but are damaging to the business in the long run tend to be weeded out because the difference between such short term thinking and long term thinking is made manifest in the profits and losses of the company. The long term thinking is rewarded and short term thinking is punished. By contrast under compulsory unionization, short term thinking is to a certain extent encouraged. Profits that are made by decisions that are profitable in the short term but destructive in the long term can be kept by the managers and shareholders because they are transitory and already gone by the time the next union negotiations come around. The union can’t get their hands on them. Even worse it becomes difficult to distinguish between long term and short term thinking. From the point of view of an investor looking at two unionized companies or an upper level manager looking at two divisional managers of a unionized company, there is little to distinguish the between the two. If one manager increases productivity, profits rise in the short term and then fall in the long term as they are extorted from the company by the union. If another manager makes a decision to cut corners and use substandard materials, his profits will rise in the short term and fall in the long term as he losses clients. From the prospective of the investor or upper management the results look to be the same, short term profits and long term losses. From one perspective this is a distortion of information in the hayekian sense that leads to bad decision making, but from another perspective one could argue that unionization destroys the difference between good and bad decisions. From that perspective one could argue that there is no good decision for the management of a unionized company to make.

In a free market, losses or even worse the prospect of bankruptcy are to be avoided like the plague. To the extent that senior managers are paid on performance or are even share holders of the company the incentive to avoid losses or bankruptcy are obvious. Further either will make capital more expensive or harder to come by in the future. However under compulsory unionization the incentives are different. The only thing that can make the union willing to moderate its demands or in extreme cases actually offer concessions is the prospect of the company going out of business. (As Eastern airlines shows this is not always true, some unions would rather the company go under than make concessions.) If the union is willing to dicker, then the management gains new a perverse incentive, the incentive to be mediocre. As long as the company is near the edge of bankruptcy management may hope for concessions. As long as the company underperforms, moderate demands can be hoped for. If the company starts to flourish however, the only thing to be expected is more extreme demands from the union. (This is why unions that refuse to budge even in the face of disaster as at eastern airline are acting in a certain sense rationally. Only if an entire industry is threatened does it make sense for the union to make concessions, otherwise they are underwriting the bad management of a particular company and encouraging other companies to get in trouble. This more than anything ought to show the perversity of compulsory labor unionism.) So for a unionized company mediocrity becomes the path of safety for management.

It is quite right to say that truly competent management would not succumb to these incentives, but do the right thing regardless. So, now I want to turn to the effects of these incentives on management and the types of people who are willing to work as managers and who will flourish as managers under the above incentives.

Let us take three managers Manager Able, Manager Bad and Manager Cares-less. Manager Able is the type of person who is conscientious and always thinks things though logically and makes the right choice. Manager Bad is the type we all know if we have ever worked in a large company that is not well managed. He is the type who joins a project just as it is about to succeed and takes the credit. He is an expert at making short term decisions and taking the credit for the short run returns but bails from the project before the long run arrives. In short he is a prick who’s only talents are sucking up and self promotion. Manager Cares-less is also a type we all know, the kind that goes along to get along. If the company he works for is well managed and the incentives are right he will perform adequately possibly even very well, but if not, then not. How will these three managers fare under the above incentives?

Manager Able will ignore the incentives to short term thinking and against long term thinking. He will understand that the long term always comes and that only long term thinking really works. So his decisions will always be to make the right choice. But think what this looks like to higher management, Manager A is always investing the company’s money in projects that make money at first but that start to fail as the union increases its demands.

Manager Bad on the other hand looks wonderful. His projects almost never need increased funding, long term increases in productivity are not for him. He is always cutting expenses that are important in the long run but have no short term impact. Manager B may be wreaking havoc on the company but it is not apparent to his managers, they see the same short term profitability that Manager A achieved but without the initial costs.

Manager Cares-less will at first be somewhat random in whether he adopts long term or short term profitability as his goal, but as the incentives work on him he will start to act in a way indistinguishable from Manager B. This because unlike A who will stand up to criticism from higher management and do the right thing anyway, C will go along with what his manager wants.
From the perspective of higher management A is underperforming, C has trouble at first but improves, and B is a star. Consider who will get promotions, who will leave the company and who will stay.

This only considers the first two incentives. Once the incentive to mediocrity hits Manger A is in even more trouble. He is the one who is always threatening the company with superior performance, that is, with higher labor costs.

Obviously this process will take time. At first a well managed firm will have almost all As and Cs (at this point in a well run firm they will not be easily distinguished.) in management Bs will be weeded out early. But over time the perverse incentives will make Cs act badly and make Bs look good. At first higher management will be overwhelmingly made up of As with a few good acting Cs but as it gets harder to distinguish good performance from bad more Cs good and bad acting, and eventually Bs will end up at higher levels in management. In this context it is significant that G.M. and Chrysler have been unionized for a little more than 70 years, one life time (i.e. three score and ten) or two long generations (i.e. 35 instead of 25 years). This is more than enough time for the rot to become pervasive.

This brings me back to a part of the Dr. Reisman’s post “The philosophical tapeworm lay within the minds of those running the company. For decades, it led them never to take a stand on principle and forcefully resist the UAW. Always the present cost of a major strike was allowed to outweigh the prospect of the ultimate destruction of the company, which was never considered fully real because it lay in the future.” Part of this mentality is the result of the type of person who will work at a unionized firm in face of the aforementioned incentives. At first with long term oriented management there will be attempts to resist unionization or at least unreasonable demands by the union. But as the perverse incentives work their way with the type of people in management the will to resist will be lost. The long term will be unreal to the type of manager who will flourish in such a company.

In sum, it is true that G.M. has had bad management that in part led the company to ruin. But true economists do not look only at surface causes as Dr. Reisman’s critics do. As the late Henry Hazlitt wrote, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” It is above all the policy of compulsory unionization that has led G.M. and many other great American companies to disaster and in many cases total destruction. Dr. Reisman is enough of an economist to understand this and brave enough to say it.

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