Posts Tagged ‘capitalism’

If you missed the discussion going on at Mike’s post on vouchers and making a profitable school, then I encourage you to check it out.  Part of that discussion made this article at the WSJ stand out even more to me.  Danone, or Dannon as it’s known in the states, is very active in selling yogurt and water to the poor in Africa.  But this is not philanthropy…it is business:

Mr. Riboud began to see he was missing out on the huge untapped market of products for the poor. In 2004 in Indonesia, Danone’s local managers presented Mr. Riboud with a pyramid diagram showing that out of the country’s population of 240 million, just the 20 million at the tip of the pyramid could afford Danone’s food.

So he decided to develop a cheap, on-the-go drinkable yogurt for poor consumers and children. “Why shouldn’t I be doing business with them, too?” Mr. Riboud recalls thinking.

The first such yogurt debuted in Indonesia at the end of 2004, selling at 10 cents for a 70-gram plastic bottle. The yogurt was an instant hit with lower-income consumers and children in particular, selling 10 million bottles in its first three months on the market. It is still one of Danone’s most popular products in Indonesia, where the average per-capita income is about $11 a day.

Two-and-a-half years later, Danone teamed up with Muhammad Yunus, the Bangladeshi who later won the Nobel Peace Prize for his microcredit program that lends money to poor entrepreneurs. Mr. Riboud and Mr. Yunus, having met over lunch, set up a joint venture called Grameen Danone Foods Ltd.

The idea was to sell an affordable seven-cent yogurt product called Shokti Doi—which means “strong yogurt.” Fortified with vitamins and minerals, it was to be sold through local women who would peddle it door to door on commission.

For the 54-year old Danone boss, who eschews ties and gets around by scooter, the Shokti Doi initiative was something of a personal mission. His father Antoine, who preceded him as chief executive, had instilled in him an interest in ventures that had a chance to both make money and give a lift to the poor—the “double project”, as he called it.

Within a year, though, Grameen Danone hit a wall: Milk prices soared, factory openings were delayed, and the saleswomen couldn’t earn a living selling yogurt alone. Today, a significant portion of sales of Shokti Doi come from urban stores, not rural villages as planned.

Danone stresses that none of its low-income consumer efforts are charity. “Danone is not an NGO,” Mr. Riboud says. “Learning to make a nutritious product that can be sold for eight cents without a loss helps us when we put in place a volume strategy, even in mature markets.” [emphasis added]

I think this last line is key.  Not only are they seeking a profit, but foresee that the efficiencies they learn in trying to reach such a poor market will ultimately help them in the more affluent markets.  Certainly Danone may not be indicative of all business… but it does represent the ability for private enterprise to make a profit, and reach the needy.

Danone says its emerging-market bottled-water business is already more lucrative than its water operations in developed markets, which includes the pricey Evian brand. The company strives for “satisfactory and durable profits, but not to maximize profits,” says Danone deputy general manager Emmanuel Faber.

Maybe some forward thinking companies like Danone would be the ones to spring up if education reform allowed competition through vouchers?  The article, as quoted above, mentions Muhammad Yunus – who I wrote about in this post a year ago.  It’s people like these that can re-frame the vision society has of the free market and capitalism.

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A while back I wrote about Toyota and the question of whether the free-market may have failed in regulating itself by the presence of the safety failures that occurred in their cars and trucks.  And now we are facing back-to-back tragedies with the mine explosion in Virginia, and now the BP oil-drilling rig explosion in the gulf.  Both companies had numerous fines and citations to their record (but, ironically BP was up for two government safety awards meant to be held this month).  So what is the deal here?  Has regulation failed?  Capitalism?  Does it all boil down to greedy CEO’s?

I would say a little bit of it all… plus other intangibles.

Did regulation fail?  I’m thinking, yes.  How exactly is it that a company receives 500 citations and fines a year and is continuing operations?  Look at the mine example:

Among the hazards are infractions related to air quality; development of a mine ventilation plan; equipment testing; and accumulation of combustible materials, such as coal dust, according to U.S. Mine Safety and Health Administration records.

As production at the mine has increased, so, too, have the violations.

In 2008, the mine produced 363,923 tons of coal and received 197 citations. Last year, it produced 1.2 million tons of coal and racked up 515 violations, the highest amount of violations in the past decade. The proposed fines for those violations amount to nearly $900,000.

I understand that companies are able to appeal certain decisions, and continue operating while working on citations.  But perhaps there should be a limit to that – say your first 20 violations?  I’m not completely versed in this world, so perhaps these are tickey-tack violations that should not disrupt the flow of operations… but they sound pretty big to me.  I’m curious if there is a combination between owners bent on profit, regulators enjoying revenue from fines opposed to work-stoppages, and some serious connections to lobbying efforts in DC to keep things running smooth.

BP meanwhile is an interesting study.  The CEO of BP had apparently done great work in the name of increasing their safety record and costs.  And the oil rig belonged to a contractor, not BP, though the British giant certainly is the overall boss here.  But this case includes not only loss of life, but an extreme environmental catastrophe with a deep-water gusher spewing out thousands of barrels of oil a day into the gulf – with no convenient way to stop it.  So, again… who or what deserves the blame?  Again, I will have to say I don’t know.  But I’m inclined to think it is dysfunction between government and business.

It’s not business completely, because there are lots of companies out there that have sterling reputations for safety and low accidents – so why should these bad examples eliminate the good ones’ self-regulating behavior?  It’s not government completely… they are finding the issues many times.  As I was talking to my brother this weekend I was discussing how libertarian’s are not anti-regulation, or law.  That’s anarchy – rule of law is entirely necessary even in a limited-government view.  My problem with regulation is more typically reserved for personal liberties (such as the ability to smoke, or ride a motorcycle without a helmet) that over time serve to create a nanny-state that creates even greater dependence on government and absolution on personal accountability.  The ability of a government to safeguard our coastline from anybody drilling willy-nilly is not something I oppose.

I think the overall failure could in the area of follow-through.  If your punishment for an infraction is a fine not a fix, then expect people to often just pay the fine.  If your punishment is an order to fix something within a year… expect it to take a year.  I don’t think we need new regulations per se, just better and stricter enforcement of the ones we have – a similar argument to that of our immigration laws.  Bernie Madoff was flagged for his investment scheme – but without follow up.  Massey Mines was flagged but allowed to continue operations.  Deepwater Horizons (the leased rig at the center of BP’s problem) had a history of issues… but was not considered above average by any means, and hadn’t had a reported issue since 2005.  I would say that is pretty successful, but when dealing with oil and environment perhaps even one issue can be one too many.

This is a more fully nuanced discussion than we can have here… but the fact remains, these are tragic events and we should rue them happening.  Where the problem and solutions lie I think is not entirely in one camp, but a failure of many… as is the case quite often.    But be sure, that despite where the fault completely lies… the financial cost of all this will be borne by Massey and BP, not by the United States government or any regulating body.  Which in my mind causes me to think the companies needed to do better to stave off these accidents, and that their share of the fault is higher than any other entity I could drum up.

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Imagine a magician standing on stage. He plucks you from the audience and asks you to think of a number between 1-10. He then instructs you to multiply that number by 9 and to add the digits together to make a single number. (For instance, if your number is 47, you would add 4+7 to get 11.)  He tells you to subtract that number by 5. This will be your new number. He asks you to convert that number into a letter of the alphabet where A=1, B=2, C=3, etc…and to think of a country that begins with your letter. (If your number is 1, you may think of Albania.) Now he asks you to take the second letter of your country and think of an animal that begins with that letter. (If the country was Albania, you might choose a lion, since the second letter is “L”.) Now imagine the color that typically goes with that animal. (For my example, I would say a yellow lion in Albania.) Got it?

The mentalist stares at you intently, as if reading your mind. You try to project your carefully chosen phase into his head. He places his hands on your temples and receives your “vibes”. An image comes to his mind. He tells you that he now knows what you are thinking but finds it very odd,  “considering…there are no grey elephants in Denmark!” Your mind is completely blown. The audience applauds and you go back to your seat wondering how he was able to read your every thought. With so many choices, how could he have possibly known what you were thinking?

Obviously, there is no magic involved. It’s just a silly math trick. Adding the digits of any multiple of 9 between 1-10 will always equal 9. Any number you choose would have resulted the same way. 09, 18, 27, 36, 45, 54, 63, 72, 81, 90…they all equal nine when the two digits are added together. The rest is just a roundabout way to get you to think of the letter D by creating an equation that results in the number 4. The more choices you “make” the more you are led to believe you have free will in the matter. The truth is, as long as you did the math correctly, you will always end up with the letter D. Denmark is the obvious country. Elephant is the predictable animal to choose. The rest is just showmanship on the part of the mentalist, how well he sells his “mind reading”.

Tricks like this work because most people don’t stop and question the process. If greater inspection were given, one would see that the game is rigged from the very beginning. The outcome is always predetermined. It’s a lot like the election of 1912. (more…)

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One of the largest frauds in the history of the world is happening right now. And make no mistake about it, like all other frauds this, too, will come to light. It will make the housing crisis seem insignificant. It will shake the financial markets to the core. It will likely cause the dollar to lose immense value and may even lose its reserve currency status. Simply put, this is the mother of all crises and it has yet come to pass. It’s the brainchild of Robert Rubin. And no one gets to be Treasury Secretary or Fed Chairman without understanding how and why it works. And when the shit hits the fan, your tax dollars will be used to bail out the banks that, right now, are making billions hand-over-fist by manipulating markets. Like all great frauds, this one started with a simple, moneymaking scheme that eventually became institutionalized corruption.

Back when Robert Rubin was in London overseeing Goldman Sachs’ gold trades, he figured out a very clever way to finance operations. He borrowed gold from central banks at 1% interest, virtually free money, and then sold that gold at market value, investing the revenue into US Treasuries, which during this time had interest rates between 6-12%. That may not seem like a big deal, but bear in mind that it is illegal for the Federal Reserve to sell its gold without congressional approval as its technically “our” gold. But a legal loophole allows them to swap and lease that gold, running on the assumption that the gold it leases will be returned. But therein lies the rub.

How do you sell something you have leased and must now return? Simple. As with any fungible commodity, you just buy it back. But in order to make it a profitable endeavor, it’s best if you buy it back at the same price that you sold it. So after selling the gold, Goldman Sachs hedged its bet by going long on the gold futures market, opting to repurchase the gold at a later date, at a predetermined price. This allowed Goldman to buy back the gold and return it to the central banks while making a big profit in process. All the while, the central banks never counted the gold as having left their books, as is the case with a lease. This created a “double booking” of gold, a situation where real gold was sold on the market, increasing supply, while the same amount was also being counted as if it were still in the central banks’ vaults. The illusion of more gold was created, which suppressed the price. Thus allowing the game to continue. The only problem was the limits of supply.

In order to understand what’s happening now and what the fraud really is, one must understand the Gold ETF market. Think back to a time when the dollar was still redeemable for gold. Each bank was required to keep a minimum amount of gold in reserve, a fraction of the paper money in supply. The concept worked on the assumption that not everyone will demand gold at any one time so it only needed a fraction of the wealth it claimed to possess. This allowed for banks to lend out and create out of thin air more paper money than gold it actually had. So long as confidence remained and there was no run on the banks, the system worked. Eventually, any pretense of having a commodity-backed currency was eliminated and the US switched to full fiat money. In truth, the gold-backed paper was fiat too. It just operated on the false notion that the paper could, theoretically, be redeemed for real gold and silver. But having a fractional reserve system makes that unsustainable in times of crisis, which is the only time people would want their gold. Getting off the gold standard ended the charade completely. But that’s currency. (more…)

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YO In Trouble

This means I'm cool

When I was growing up it seemed that everyone thought it was cool to scrap off the “to” and “ta” on the back of their Toyota pickups so that they drivers behind them saw just a YO.  Needless to say it was about as cool as putting a NOTW sticker on your car – according to some.

Well now a couple decades later and Toyota is not a tiny little maker of cheap pickups, but the largest auto manufacturer in the world.  And in case you haven’t been reading or watching the news, they are in a bit of a pickle.  They are recalling vehicles faster than a UAW worker will threaten strike over missing a break Lindsey Vonn on a downhill slope.  There is no shortage of discussion in business schools and papers about what went wrong at Toyota, and what management needs to do to correct the damage done.  Well, my brother Greg wants to know, “How come CAI has no reporting on the Toyota fiasco? Doesn’t this have something to do with the free-market and capitalism and all that?”  As any reader of CAI will know, I am fierce defender of capitalism and the free market.  But what needs commenting?  The market is acting.

Toyota’s stock has dropped $20 in one month, as investor confidence is shaken and stockholders foresee huge revenue losses amidst lawsuits and recall costs.  And it will take a while for it to recover (though I think through this all, consumers will still prefer Toyota over Ford) but eventually with their business skill it will recover.

But more than share price the point is, or that I think maybe Greg was inferring is… is this a failure of capitalism?  Did greed outweigh the need for safety?  Proof that the free market can’t police itself?  I don’t think so.  I don’t believe there is a grand conspiracy behind this, but if there is it will come out and punishment will be handed down.  Capitalism isn’t perfect, as I’ve stated many times, I just believe it is the best of the options out there.  Toyota as a private company is no more immune to failure than the IRS.  The special aspect of the free market is choice.  Toyota made a mistake or failed in some way and I have choice of whether to trust them again, or not.  If a government institution or nationalized company makes a mistake, what is my choice?  Where do I turn to?

An economic treatise may provide little solace to those affected by the deaths reported in this debacle.  But they will get their day in court and sue for wrongful death, which is a sad somber fact of business.  You can try to sue the government if they allow you, but does it cause less pain to sue one over the other?

As I’ve quoted before, “…the trouble with capitalism is capitalists”, but the problems with other systems are the systems themselves.  So I suppose you could correctly view this as a failure in capitalism, as long as you viewed the results provided by other systems as bigger failures.  If Toyota was remiss in anyway we will see the results in how people respond, and they are responding in lawsuits galore.  But the market is working.  Capitalism is functioning.  I hear lots of questions and complaints, but I’ve yet to be offered a better alternative.

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The Shark Tank

I’ve become an enormous fan of ABC’s Shark Tank. If you haven’t seen it, let me briefly explain the premise to you: Five ultra successful entrepreneurs (the sharks) sit in big, comfortable chairs and entertain business ideas from would-be entrepreneurs. And, well, basically, that’s it. It’s not exactly a premise that I would have signed off on if I were an executive producer, but then again I would have had my reservations about Seinfeld as well.

Sometimes one or two of the sharks jump on board and agree to put their own money on the line to buy themselves a portion of these new ventures. Sometimes they get into a bidding war with each other. Most of the time they examine the business inside and out, only to ultimately turn it down, agreeing that it’s not a worthy investment. But, like I said, there’s little more to it.

The first time I saw it, I was convinced that there would be follow up and we would hear more about the ventures discussed with the sharks, and there would be heart-warming stories of the sharks’ involvement in these people’s lives. But, as far as I can tell, we don’t. And I’ve come to realize that I love the show exactly for this reason: there is no gimmick, no heart strings being pulled, no phony crying. Instead we get a close-up, raw look at capitalism and, in particular, venture financing.

It’s fascinating to see the ideas that are presented, and to see the different ways that individuals attempt to bring products to market. Most of them have a cottage industry running out of their garage or basement and have already spent their life savings attempting to make it work. In many cases entirely families are brought in to the operation and have taken on a roll in the company. In this sense you can see capitalism working as we would hope, in that it taps the creativity and potential of people who are not politically connected or of any particular esteem, but who have an idea and a will. In some cases you also see poorly thought-out ideas getting hit by the light of day, as the sharks dismiss them in rather shark-like fashion.

When the show is at its best, you see the sharks attempting to bluff disinterest in an idea, hoping to ward off competition, only to eventually make a casual offer that betrays their demeanor. When it turns out that two or more of the sharks are bluffing, things really get fun. In some cases the sharks go after each other, occasionally getting heated up in the process. Often, however, their differences are resolved in a partnership that satisfies both competing interests. The sharks are never moved by sympathy for the presenter; they only proceed on the basis of whether or not there is an opportunity to add to their already vast fortunes. It’s not exactly a model of Christian virtue, but again, that’s not the point of the show. It’s because they are heartless that the best ideas get financing and the rest don’t. (One of my favorite scenes involved a kind-hearted college kid who had invented glutton-free play-do, and he wanted financing to build a manufacturing plant. The sharks asked him why he didn’t just sell the idea to one of the three big toy manufacturers and he replied that he wanted to create jobs in his community. The look of incredulity that this statement was received with was absolute television gold). Many people do get helped, but only in a manner that Ayn Rand would approve of- they are helped on terms that help the helper. It’s a reality show that actually feels realistic, it’s raw capitalism, it’s fascinating and it’s entirely entertaining.

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I’ve hinted at this in an earlier post, but I’ve never made the explicit jump into economics.  Whether a particular American likes it or not, America is primarily possesses a maket-based economy.  The consumer plays a vital role in the market-based economy.  For example, in such a way as to keep a business “ethical,” the consumer has the option of not purchasing via boycott.  This will either put the “unethical” party out of business or pressure them to change their practice.  I mention these extremely basic principles to eventually point to one of my favorite topics: Major League Baseball.

Now, where I would criticize capitalism is that it is very common that once the public is aware of “unethical” behavior, say, on a corporate level, the damage has been done.  If Walmart moves into town and is doing something unethical, it is very likely that the public will not be informed of this until the small businesses have already been obliterated – if the public finds out at all.  And even if the public found out before the “damage was done,” so to speak, they may not desire to fork over the extra cash to pay for something domestic and/or from a small business when cheap imported goods are so readily available.  The same will go for the agricultural industry.  Thanks to shoving innumerable cows into inhumane stalls that are far too small for their bodies and injecting cows with hormones while feeding them God-knows-what, the impoverished family is much closer to affording beef.  There are more humane/ethical options with regard to purchasing/eating beef (though some might thing there are no grounds for consuming meat at all), but those aren’t exactly options when the steroid beef is but a small fraction of the price.  I believe there is a solution to this problem, but I’m not going to get into that now.  Instead, I will let my mention of “steroid” two sentences ago segue into my main point regarding baseball.

After the 2000 season, Alex Rodriguez, a free agent, signed to the Texas Rangers for a record $252 million 10 year contract.  Eventually he was traded to the New York Yankees and was eventually signed to the Yanks for $275 million (2008-2018).  I did the math just now, and accounting for leap years (2008, 2012, 2016) A-Rod makes $.79 a second.  Every second, awake or asleep, playing baseball or cheating on his wife (now ex-wife), etc., the man makes $.79.  “That’s despicable!” some might cry out.  But this is where my love affair with capitalism actually takes place.

You see, the consumer may find out the salaries of these athletes before they even set foot on the field.  Whatever is unethical about the salaries of athletes is already quite visible to the consumer.  The consumer can choose to boycott baseball.  I may consider it the best sport in the world, but I’m not talking about food, shelter, or clothing.  I’m talking about recreation.  Though I would consider recreation essential to living, baseball itself is not.  Who’s to say they shouldn’t be making so much?  WE pay their paychecks! As I’ve said before, we can choose to turn off the television.  We can choose not to buy their products.  It’s not as if taxes are being distributed from the federal government to these players.  We, in our greed, are in fact jealous at A-Rod makes more in a day than the average American will make in a year (in under three hours he makes more than the average person will make in a year, globally).  In this way capitalism shows, at least in baseball, that the sickness is not in the system itself, but the people in the system – even and maybe even especially the consumer – are responsible for this sickness.

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