NP: The Hold Steady, Boys And Girls In America

Last week, Bill Maher repeated something on CNN that was the main thrust of his "New Rules" segment the previous week on his HBO talk show. The Huffington Post has the key quote, which is, essentially, that the profit motive has wrecked health care, among other industries.

I definitely think Maher is on to something here. Somewhere in the mid-eighties, particularly with the rise of management consulting firms of McKinsey and Bain, corporate America seems to have shifted its priorities from satisfying its customers to satisfying its shareholders, at the expense of everything else.

The massive consolidation of almost everything hasn't helped either, as the customer gets marginalized quite literally when smaller businesses become just a line on a ledger for a huge conglomerate. An old Chicago music scene acquaintance and I were talking about this last night with regard to the music industry, as the beginning of the end was when the record labels all were gobbled up by huge conglomerates, who then went on to "wring out the inefficiencies" in the business in order to maximize profit. In the case of the music businesses, those "inefficiencies" were artists who were not blockbuster material.

I have a hard time thinking of an industry where this sort of squeeze has been a benefit to consumers. The profit motive has brought us sub-prime mortgages in the financial sector, high-fructose corn syrup (another frequent Maher topic) in the food industry, Britney Spears in the music business, and the current, unsustainable health-care system. You might argue that retail is an exception, with the operating efficiencies of Wal-Mart and Amazon making shopping "easier" for consumers, but that's not without a cost, either, if you consider the effects on mom-and-pop stores and the idea of a walkable "Main Street" in American towns where you can get what you need without driving to a big-box retailer or a shopping mall.

The bigger thing here, for me, is that this looks like a fairly massive breakdown of the notion of the "invisible hand" that comes about from a free market, as espoused by political economist Adam Smith all the way back in the eighteenth century. This theory, in short, is that the self-interest of producers ends up benefiting consumers as well, because if producers make good stuff that consumers want, then the consumers are satisfied and the producers get paid. Everybody wins.

Except that something seems to have gone wrong in that formulation. Some of it is, as I said before, the idea that it's no longer about the consumers. Publicly-owned and traded companies give this layer of abstraction between the producer and the consumer, which, to my mind, allows for a depersonalization of the consumer on the part of those investing in the company.

Another part of it, somewhat ironically, seems to be the same fatal flaw that exists in communism, in that there's a limit to how big capitalism can scale before it breaks down. One thing that has always stayed with me after reading Karl Marx in college is that there's a point in "pure" communism where a central authority has to have absolute power over the society, but then relinquishes it in order for everyone to be equal. Typically, it seems that the central authority quickly realizes it likes that absolute power, and doesn't ever give it up.

If this is a function of the size of the society -- and I'm not sure if it's that, or if it's more of a function of moving from theory to practice -- then I think we're seeing a similar fault point with Smith's theory, although at a much larger point along the scale.

This was articulated by no less authority than former Federal Reserve Chairman Alan Greenspan back in October of last year, when he testified before the House Oversight Committee. As USA Today reported at the time:

Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.

Greenspan called this "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

This is revealing for two reasons. First, that the most important protection that should be offered by the banks would be to their shareholders rather than their customers, and second, that self-interest wasn't sufficient. Or, perhaps more importantly, had somewhat suddenly become insufficient, as Greenspan also said "I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well."

So, what changed? If I were to guess, it's a combination of massive scale and massive diversification, which gets neatly illustrated by the music industry example. Some of this was just progress along a continuum, while some was inflicted by tacit changes to the regulations that dictate how big and how diversified these companies -- particularly financial institutions -- could become. It's not so much that so many companies have become "too big to fail," as much as they've become so big that they fail their customers.

Is there a solution? I'm not an economist, but I have to think some sort of divestiture might help on the part of these massive companies, and I think we're seeing some selling off of assets as a response to the current economy. Whether that's enough, and whether that needs to be helped along is another matter that I'll leave for others to discuss.