Saturday, April 10, 2010

Nationalizing Businesses to Save Profits

Dan Kennedy has an interesting article today on entitledLet's Outlaw YOUR Business Next. If the "reasoning" that has been publicly expressed for the Government to take over student loans is correct, then the title question is a valid one. The "reasoning" goes like this:

-At each stage of the process that brings consumer goods to the public, there are middlemen who create a market.

-Each middleman siphons a small profit off the transaction.

-If each such middleman could be cut out, why huge amounts of money could be saved by the average consumer.

-We could all hold hands and sing Kumbaya around the camp fire.
Such "reasoning" is actually sophomoric, and one soon learns when one starts into business that so called "middlemen" are the indispensable men in bringing any commodity to market.

Imagine, for a moment, that there are no commodities markets, no packagers, or wholesalers, and that each farmer has to do all of these things himself, and retail his product himself. Let's take a farmer who grows corn. In the real world, he sells his crop before it is planted to a trader on the commodities market, or to a packager as the case may be. The farmer is assured of getting something for his crop, and the buyer ties up the crop at a know price. The farmer could theoretically sell his crop for a higher price if he sold directly to the consumer, but there are risks to doing so that are borne instead by the traders in the commodities market. But in our tale, our farmer instead has to sell directly to the consumer. But what if he doesn't get it all sold before it spoils? Well, so now the farmer has to set up a canning factory to can his corn. Of course, his canning factory will only operate for a month or so out of the year, and sit idle the rest of the year. Does having a little canning factory at each corn farm sound like a good use of funds to you? I could go on, but by now you probably get my point. Each grower of corn would need to have canning factories, warehouses, put up with inspectors from the health department and the agriculture department, and on and on. His invested capital would be enormous.

Middlemen in the system actually make the system more efficient. And profits? Profits are a way of accounting for, or monetizing, the risks each takes even if he performs everything correctly. The bigger the risks, the bigger the profit. But, The One knows better. He is smarter than all the folks who have worked the system out over the centuries. He is smarter than even history, as Kennedy says:

So to the news media, if you get around to noticing this latest nationalization, here’s an obvious for you to pose. (And you should refuse to have it laughed off or shrugged off or dodged by Robert Gibbs or an administration economic advisor or even by The One Himself): If it makes sense to cut out the middlemen by government takeover of one industry, (a) why not do it with every industry? And (b) why is this such an unmitigated disaster everywhere it’s tried, here or abroad, in history or at present?

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