For a time, "economies of scale" meant that the key to success was making a business bigger, and focusing on nothing more than profit. Sell more products however you could, and cut costs as much as possible. This is no longer the case. We're entering a time when smaller businesses that solve real problems can be profitable, and the former behemoths are becoming dinosaurs.

The past

The assembly line was the key innovation of the auto industry, that famous invention of Henry Ford. By creating stations where each person did one thing, and moving the products past the people, it was possible to crank out thousands and then millions of mostly identical cars. As robotics came along, it was possible to remove people and reduce payroll. As globalization grew, it was possible to find places where the people you did need to employ cost less.

Who did this system benefit? For a while, it benefited auto workers, once the unions were in place to provide basic protections that limited repetitive stress injuries and guaranteed living wages. It definitely benefited owners of the car companies, at least the ones that survived to be bought by one of the big 3. It benefited the shareholders of the big 3, which for a time included in some small part much of the American middle class, along with many retirement funds more recently. And it brought cars and a whole car culture to several generations of Americans.

But there are many, many costs we've paid as a society for this. Many American cities had streetcar or rail systems in the 1920s and 1930s that were dismantled with the rise of the automobile. While some argue that streetcars were slow and inefficient compared to cars, many point to GM buying up the streetcar systems and dismantling them. And I have yet to see any accounting for the mass subsidization of the car system we've made over the years, the cost of paving the millions of miles of roads and parking lots, the gas distribution networks, or health issues related to air pollution. That's not to mention the opportunity cost of dedicating all that land to our cars.

The number of people benefiting from the car companies is quickly declining through off-shoring and automation. Worse, for decades, the Big 3 have been buying up competitors and burying innovation. Rather than compete with its more lucrative mainstream cars, GM killed its early electric car program. Big car companies need to do a lot to maintain their monopoly. Big unions have arisen to provide some protection for the labor these companies needed. Big oil is perhaps the biggest benefiter of the auto industry, as it's been for decades. But the effect of all of this bigness is funneling dollars from the mass middle-class to a tiny group of owners of these companies.

The present

The car companies are saying that if you account for all the parts suppliers and other companies that depend on the big 3 for revenue, they're responsible for nearly 10% of our economy. But there's some false logic here. First of all, if the big 3 go under, we're not going to stop driving. It won't take down the entire industry--we do love our cars. What it will do is create a big vacuum in the marketplace that will open it up to hundreds of innovative startups, giving them a much bigger opportunity to succeed.

If the big car companies fail, there will be a lot of talented people who know how to make cars looking for work, and many of them probably have some brilliant ideas to make them better. I think we'd see a renaissance in the car industry, with many companies going out of business but a lot more starting up to take their place. The old car industry has long been complacent, relying on heavy marketing to make their outdated business model keep running. And it worked, for a surprisingly long time.

The problem is, the assembly line is obsolete. It appeared during a period when talent was scarce, and raw materials plentiful. So big car companies got big by doing what they could to produce more with less people. Much of our business world has the idea that you make more money by replacing jobs that take skill with jobs that do not. Make the process smart, and make it so you can put a trained monkey (or robot) in a position so you can reduce your cost and make more money.

Unions stand in the way of this, protecting workers' pay while their jobs become ever less. So these workers, their pensions, and their health-care benefits become a huge cost for the American car companies, compared to foreign companies that do not need to pay for these costs. Yet ironically, by paying decent wages, these companies also create people who have money to buy their products.

Here's the real reason we're in a recession and facing even worse: our entire business system that has been built on maximizing profits has worked so effectively in funneling capital to the wealthiest and away from our middle class, that the vast numbers of Americans can no longer afford to make the purchases that keep our economy running. We're quickly becoming share-croppers in a neo-feudalistic world, slaves to our wages that effectively dwindle against rising health-care costs, mortgages that are 10 times as much as our parents, and fuel costs that have only diminished because nobody can afford to buy anything.

Who needs a bailout?

Now, I'm not suggesting we do nothing. If the big auto companies go out of business, there will be a lot of people out of work, with no safety net to keep them afloat. We pride ourselves on being a place where anybody can start up a business and potentially do really well--but the reality is, this is really hard to do in an environment where your potential customers aren't buying anything.

I do think we need a bailout. I just think that rescuing the car companies is not who to bail out. We need to soften the landing of the hundreds of thousands of people who may find themselves suddenly out of work, and we need to figure out how to get capital in the hands of new entrepreneurs who can put these people back to work. The car companies have proven they're not the ones with any sort of vision for the future, so they need to die now.

Right now, the barriers to creating a new business are steep. Very few people understand everything that's involved in starting up a business, but most understand that the stakes are high if you have no other source of income. Many, if not most, successful businesses are started by people who have saved up a good amount of seed capital, or have spouses with a stable income, or by those who have done it before and have connections. Without money or connections, it's extremely difficult to start a business.

I think we need a national program to help match engineers with business people and ideas, and provide seed money to get them launched.

There's a few nascent events in Seattle along these lines: 6-hour startups, startup weekends, and the like put smart people in the same room and let them see if they can develop some sort of web site with business potential. We need this kind of thing expanded to include more than just software people, and also provide some financial backing to see if they can get running.

This is basically the role of venture capital, but the biggest problem with venture funds is that their timelines are too short--they expect a profitable exit event within a few years, and won't necessarily fund something that isn't designed to make a huge profit in a short amount of time.

Some of the work of the Small Business Administration and the Small Business Development Centers is admirable in this area--the problem is, not enough people know about these programs, and far too few engage with them. I think a large part of this is fear of losing health-care benefits, retirement plans, and other benefits that large companies provide at a huge advantage to smaller companies.

America has a huge mythos built on top of the entrepreneur, but very few people who actually become entrepreneurs. We would do far better to provide a social safety net for people out trying to start new ventures, making sure they have healthcare and other basic needs covered, along with the tools they need to figure out how to grow and thrive, than to bail out the decadent dinosaurs.

The Future

As bleak as the current financial system and business climate appears to be, there's a ton of opportunity for real change. But we need to re-align our business value system to make this happen. Here are three specific mental adjustments the business world needs to make.

First of all, we need to recognize that people are our most valuable asset. Where businesses used to do everything possible to make people interchangeable cogs in a vast machine, to succeed in the future they'll need to use perhaps our biggest untapped resource: our brainpower. To succeed, a business needs to find smart people who haven't had their sense of initiative crushed by working in large businesses, and give them tools and encouragement to solve real problems. Rather than the cynical marketing to the lowest common denominator and appealing to "Joe Sixpack" as the average American, we need to recognize the genius in our neighbors and ourselves. We can be so much more.

Secondly, we must recognize that we are in a dire position, and need to work together to survive. It's human nature to adopt an "us versus them" mentality. We've always separated people into our friends and our enemies. Nothing unites a people like a shared enemy. For a brief time, 9/11 brought Americans, and much of the world, together in shared suffering. In the large businesses of the world, success is measured by your sales compared to your competition. In the Cold War, nearly the entire planet was divided into the Free World versus the Communist world. But during all of this, we've been dumping waste into all the natural systems that support our very lives. We've been increasing the temperature of the planet by pumping greenhouse gasses into the atmosphere, causing galloping glaciers in Greenland and drowning cities. We've been poisoning our rivers and streams. We've been decimating entire fisheries at alarming rates, killing the great sources of our food. We've created rivers of garbage floating around in the middle of the oceans. And we've drawn down every natural resource available to us as if there was no tomorrow -- soil levels, water levels, oil levels, all being consumed to give us an unreasonable standard of living. If we don't start addressing these problems quickly, we won't have a tomorrow.

We need to focus our energy on solving these problems, because they threaten our very existence. Our human enemies are mainly just the people who are unlucky enough to be faced with these problems first. It's time to set aside our differences and get to work creating a place where our grandchildren can live.

Finally, we need to harness all the efficiency and productivity that technology provides, and focus that on solving real problems. Computers can automate many menial tasks. Large businesses have used technology to cut costs. In most cases, "costs" equals payroll--you save money by cutting jobs. But if our talent is our most valuable asset, it makes no sense to get rid of them. Instead, we need to take those assets and put them more directly to work on projects they're best suited to handle.

The rise of agriculture meant that more people did not have to spend their lives finding sustenance--people who farmed created more food than they consumed, which led to the rise of towns. Industrialization further centralized our economy into big cities, and centralized wealth into the hands of a few. Now the Internet and open source is changing everything, providing a decentralized model that completely levels the playing field--individuals with no prior connections can become as influential as centuries-old institutions. We no longer need to be dependent on big economics, big corporations, big publishing houses--we now have the tools to build small local economies. Innovation is done by individuals. Small companies with smart people can displace the old dinosaurs. We need to teach people to be smart, and encourage innovation--not teach them to be dumb, staying mute in the face of rigid hierarchies of corporations.

Let the dinosaurs die, and let's get on with solving our real problems.

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Comments (2)

S

It makes a perfect sense - time for the renaissance. As Garret LoPorto puts in his book 'The DaVinci Method', it is the perfect storm for the real DaVinci's to come out, lead the generation in the path that benefits all. Its the time to be creative, use our intelligence that we've so ignored all along, being sucked into the routine boring jobs just for the feeling of security.

14 Dec, 2008

Today there is big competition in car companies which make them too big to survive. Great post very interesting.

16 May, 2014

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