Tuesday, August 28, 2012

The Continuing Saga of Very Basic Economics...


Capitalism's roots extend back to a Scottish economist and enlightenment philosopher named Adam Smith. Smith's hypothesis on economics, the economics of his time were driven by the mechanisms of imperial and mercantile systems, emphasized the underlying motivation of self-interest driven business markets. The theory was specified in the classic tome: Wealth of Nations; first published in the mid eighteenth century and revised, by Smith, in multiple follow-up editions.

As an enlightened thinker Mr. Smith waxed philosophically about the potential for use and abuse of self-interest driven markets by various characteristics of human nature; outlined extensively in the companion tome: The Theory of Moral Sentiments; also published in the mid eighteenth century and followed by Smith's multiple revised editions.

The potential benefits and reservations about self-interest driven economics are, simply put: enlightened and unenlightened, respectively, self-interest. This post will deal with three aspects of unenlightened self-interest: deregulation, monopolies and private equity.

Deregulation

In a deregulated market the potential to manipulate prices, via supply and demand calculations, can spur companies to take capacity off-line for increased profitability. That's why deregulation appeals to product or service vendors while delivering few, if any, oft promised benefits to the consumer (see also, Wikipedia articles on: deregulation and Enron).

Monopolies

A monopoly is when a single company has 70%, or more, of the market for any product or service. A monopoly position allows a company to thwart competition by driving prices lower. This tactic does not allow a perspective competitor the kind of profit necessary to ramp up their own product in a new market. As soon as the competitor is believed on the edge of failing out of said market prices will return to, or rise above, previous levels. Monopolies are not pursued for the customer's benefit, without regard for any promise to the contrary (see also, Wikipedia articles on: monopoly and Microsoft).

Private Equity

Private equity (PE) exists to make money for its executives and their investors, in that order. You can, and private equity does, make money finding companies that are going to be most profitable as scrapped and salvaged entities. If you're on the receiving end of this trade, employed by or purchasing after, the process may seem more like plunder and pillage.

It is important to remember that there is nothing about job creation in the definition of PE. While scrap and salvage is often the fastest way for PE to make money, it is not the only way. Employees of a PE owned business will continue to have a job only if their function can not be outsourced to a least-cost (read: low wage with a flexible regulatory environment) country; often mainland, communist, China.

Anybody who buys a company from PE needs to be aware that the company will be stripped down and all the short term profit will have been taken out pre – PE – voiusly (see also, Wikipedia articles on: Private equity firm, Bain Capital and Albert J. Dunlap).

None of the three forms of unenlightened capitalism are intentionally vicious to any party, nor are they illegal, but they do add significant emphasis to the old adage, “Caveat emptor (buyer beware).”

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