Monday, January 19, 2009

Big Corporations May Not Find a Solution, But It Will Be Found

Evert Cilliers posts on the 3 Quarks Daily Blog (HERE), 15 January:

Who is the biggest King of Fraud -- Bernie Madoff or Henry Paulson? A common sense discussion in layman's language of our casino capitalism, skeevy CEOs and Pollyanna Psychosis”

“The system helps them in their cheating ways, too. In the mature capitalism of the industrialized world, where near-monopoly corporations produce too much stuff for us to buy, while the monied elite keep the earnings of the regular wage slaves down to the minimum they can get away with, you can't expect Adam Smith's “invisible hand” to help make sensible choices about where to invest capital.

Not that you ever can anyway. For example, big corporation capitalism is not going to choose to invest in green energy; they're making too much money off oil

Evert Cilliers misapplies Adam Smith’s use of the metaphor of ‘an invisible hand’ leading some, but not all, merchants to invest their scarce capital locally and not in the more profitable overseas trade with the British colonies in North America, which other merchants, less risk averse were activel engaged in under the monopoly accorded to them by the British Navigation Acts and from legislation prohibiting foreign competition with the colonies.

Those who did trade abroad made greater profits from accepting greater risks; those who preferred to invest locally earned smaller profits but added their bits to national output, making it larger than it would otherwise be.

Smith regarded this behaviour as better for the British economy.

Having explained all this and why (the whole is the sum of its parts) the invisible hand metaphor was about the effects of risk aversion; it had nothing to do with markets.

If risk aversion caused them to “make sensible choices about where to invest capital”, they didn’t need an invisible hand to lead them!

If “big corporation capitalism is not going to choose to invest in green energy; they're making too much money off oil” it may not be decisive (though most of the Big Oil companies are investing a proportion of their research budgets in alternative energy sources, as well as the Big car makers (I saw one car product on “Top Gear” TV a week or so ago, demonstrating a fashionable-looking saloon car that is powered by hydrogen, driving around Los Angeles freeways, and very smart it looked too).

Innovation does not necessarily come from the current main players in any product line; new start ups, in iconic suburban garages apparently, can create whole new industries outside the Big Corporations. Think of IBM and Apple or IBM and Microsoft. Also, aviation did not come from the research budgets of the railroad industries, nor automobiles from horse and traps.

Who knows – or, importantly - who needs to know - what inventors, innovators, or creators of the ‘next big thing’ are working away diligently, including on new forms of energy, who have no connection with Big Corporate Capitalism and unsupported by large dollops of tax funds aimed futiley at ‘picking winners’.

Market opportunities feed through, what Schumpeter called, ‘the perennial gale of creative destruction’ to replace what exists with something better. There is a large market opportunity available in new energy sources. Be sure they will be found – without aid from a mystical, disembodied invisible hand, and without State intervention.

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