Friday, April 10, 2009

Capitalism without Capitalists, Part I

I grew up in Michigan and my father and brother still live there, so the fate of the automobile companies is important to me. It’s hard to realize just how dependent the economy in Michigan is on the automobile companies. Even in the northern part of the state where I grew up, more than 250 miles from Detroit, our economy rose and fell with the car companies. When GM and Ford did well, then more people vacationed in the northern part of the state, the price of land for second homes went up and jobs building and developing land for cottages were available.

Of course when the automobile companies did poorly, so did everybody else. It may not be true that “What’s good for GM is good for the country”, but it has always been true in Michigan.

This preamble explains why I’ve been thinking a lot about why the automobile companies are in such difficulty, and why Ford is doing relatively well while GM is in miserable straights. Both companies have almost the same cost structure and the same opportunity to succeed or fail. I think I have a theory for Ford’s relative success and GM’s relative failure.

Ford is still, to some extent, a family-run business. William Clay Ford, Jr. is Chairman of the Board and Edsel B. Ford II is also on the board of directors. William Clay Ford, Jr.’s great-grandfather was Henry Ford, the founder of the company. (I think Edsel is his cousin, but I’ve never been good at family trees. Check for yourself here: General Motors lacks any such family connections. I think this makes a difference in the way the companies think.

When your family name and most of your fortune are tied up in a business, then I think you look at its long-term viability, not just its short-term success. On the other hand, when you are in the end only an employee of the business (no matter how highly compensated), then you look at the shorter term.

A business owner whose life and fortune is inextricably connected with his company is a capitalist, putting his own fortune at risk with the success of the business. If the owner of the business isn’t at risk personally, then he really isn’t a capitalist—and I don’t think our market-based system works properly when the person running a business doesn’t have the extra edge that comes from having his own money at risk.

1 comment:

  1. As Johns' Michigan brother, I can attest to the above. Over the past decade it has been a near depression level economy here, as the auto companies have struggled. When times were good in the 60's and 90's, they were very good. There are nearly one million retired Chrysler and GM employees, a high percentage living in Michigan. About half of those would have retirement benefits significantly reduced if the auto companies file for bankruptcy. Everyone is holding their breath to see what is going to happen to the state.

    Ford is the bright spot in the US automotive world. Bill Ford & his family, who owns a dog from the same litter as one of our dogs, (our dog in-law?) showed themselves as caring, considerate individuals to our good friend who raised the litter. In addition to the family name and fortune tied into Ford, I think having individuals that are caring, responsible people at the helm make a difference to the success of a company during difficult times. It's not often that you can say that about people running large company in these times.