Saturday, November 25, 2006

Why I Love Forbes

Every principled advocate of capitalism should work to continuously concretize those principles, i.e. see and digest real world business examples and then integrate those particulars back into their understanding of the principles. This process deepens understanding of the breadth of scope of applicability of these principles, and helps to counter claims that "capitalism only works sometimes" or "markets sometimes fail". I was first consciously introduced to the process of concretization in business school when exposed to the "case method" of study, whereby students learn and integrate key business principles by immersing themselves in a real world "case study" and attempting to apply those principles to decisions they would be faced with. I learned of the crucial importance of it during listening to Leonard Peikoff's The Art of Thinking.

Today the topic of business strategy and tactics is by far one of my favorites, and I continually try to expand my understanding of business by reading various journals. By far my favorite source of concrete examples of capitalism is Forbes magazine. Given the philosophical shortcomings of most defenders of capitalism today, I find that this magazine comes as close to being a principled surveyor of capitalism as one can find in the popular media today.

The magazine provides broad coverage or all aspects of business today. I am continually stunned by the variety of possible business models in practice today, and Forbes surveys them all, from technology, to commodities, to financial to entrepreneurial. Additionally, the story formats cover enough background and plotting to keep the stories interesting, while keeping the stories accessible to the lay reader.

The magazine conveys a tone of respect and admiration for business throughout. Successful business leaders are treated with admiration, and their insight and fortitude is celebrated. Business failure is analyzed, not as scandal or a pervasive blight, but honestly, and as an integral part of market function. Finally, the fruits of labor, material and spiritual happiness are celebrated rather than scorned.

The magazine argues from sound economic principles (albeit mixed philosophical principles). Steve Forbes is one of the premier advocates for the gold standard. Publisher Rich Karlgaard understands that it is man's reason and insight that drive entrepreneurs. The analysis of business structure is usually clean and essentialized.

Compare this treatment with Fortune, which treats business failure with the air of tabloid scandal, and successful businessmen as "players". Or worse yet, consider what passes for "business news" on NPR's Marketplace, whose broadcasts drip with contempt and sarcasm for the very object they purport to cover and serve, and who spend more time reviewing "market failures" than the markets themselves.

If you fancy yourself and advocate of Capitalism, whether you are in business or not, a subscription to Forbes is worth the price. It is accessible to the lay person. It will help you concretize the principles behind the workings of business, and most importantly, will give you a weekly shot of reverence for business and businessmen.

Monday, November 20, 2006

FDA Approves Silicone Breast Implants

From a November 18th Wall Street Journal article, FDA Approves Silicone Breast Implants,
Nearly 15 years after banning silicone breast implants in most cases, the Food and Drug Administration approved revamped versions at a time of soaring demand for cosmetic procedures.

Many of the original marketers, who lost billions of dollars in lawsuits related to allegedly flawed silicone implants, are long out of the business. Still, the FDA's approval late Friday will accelerate a push into aesthetic medicine by two companies that are heirs to the U.S. breast-implant business: Allergan Inc. and Mentor Corp.

Dow Corning Corp., a subsidiary of my company, The Dow Chemical Company, was one of those "original marketers". Forced into bankruptcy by class action lawsuits backed by little more than arbitrary claims, and junk science, Dow Corning finally settled for some $13 billion to avoid litigation that it probably would have only partially won, even though it had solid science behind its case.

Such is today's environment when class action against large corporations need little more than accusations and a sympathetic jury to find in their favor. With the conventional wisdom predisposed to be suspicious of big business rather than respectful of it, its no wonder. The implant business at Corning was a small business generating little revenue, and Corning, in the end, did nothing wrong. Vindication comes a decade too late.

Sunday, November 05, 2006

The Cost of Socialism...

The American Economy is one of the most competitive on the planet, right? The Bush tax cuts have worked their magic and we are more competitive than ever, right? Not so fast...

In a recent speech to the Detroit Economic Club, Dow Chemical Company CEO Andrew Liveris highlighted a little understood fact: The U.S. is one of the least cost competitive countries in the world, and the gap is growing. A recent report from the National Association of Manufacturers highlights the issue, and its causes.

If you're thinking that by "least cost competitive" I am comparing The U.S. to such notable low-cost coutries as India and China, think again. The U.S. is falling behind it's more developed brethren; countries such as Canada, Japan, German, and the U.K.! How big is the gap? Even after normalizing on the basis of unit of productivity, the U.S. still lags in cost competitiveness by 30 percent, up from 25% just 3 years ago. This means that it costs 30% more to manufacture one unit or one pound of something here, than it does everywhere else.

In a global economy, and especially in markets that are global such as heavy industry, chemicals, steel, etc. this is an untenable level of advantage. It reduces the U.S. to a local suppliers, and also strikes the U.S. from the list of location for new investment.

The causes of continuing increases? They can be traced to 5 distinct causes, all the result of failed political policy. If you think the Republicans are saving us from disaster, think again. None of these have been addressed by any recent administration. Here they are:

  1. Corporate Taxation: yes, while Bush was cutting income taxes, he failed to mention that these tax cuts were progressive, i.e. they gave a proportionately higher cut to the poor. Corporate taxes were not cut at all. While this was happening, competitive nations were reducing their corporate tax burden.
  2. Regulatory Compliance: the cost of compliance with such things as environmental regulation can be measured, and the tally is not pretty.
  3. Energy Cost: Over-regulation of nuclear and restrictions on drilling for oil have taken their toll. The demand has been shifted mostly to natural gas, and this fuel stock is difficult to transport. As such we now have a basic economic situation, demand is outstripping supply, and the costs are skyrocketing.
  4. Tort costs: when people view corporations as inherently evil, and their needs as a claim on the nearest corporation, then the justice system will be twisted into a form of ongoing punishment for corporations. This is what is happening today.
  5. Employee Health Costs: In today's world, healthcare is now a right.
The effect? Existing U.S. manufacturing supplies local, not global markets, and corporations looking for manufacturing that can serve global markets go elsewhere for investment. Liveris gives a very enlightening perspective on his company's investment decisions.

The ultimate solution: lasseiz-faire. Leave the free market alone. This is a policy that neither of the political parties are the least interested in, and one which even our business leaders cannot morally defend against. Witness, Liveris' comment regarding environmental regulation,
No one is suggesting that all regulation is bad; much of it we couldn't live without.
Anyone interested in the details needs to read both Andrew's speech (which other than a few philosophical inconsistencies, expresses admiration for the modern industrialist and America) and this detailed report.