Friday, January 27, 2012

Co-Opted Industry

In his weekly op-ed piece, Krugman takes a look at how the two different sides of American politics see the economy and how it works.

Krugman uses Mitch Daniels's response to the SOTU as a launch pad for this discussion. Where conservatives see strong, singular companies as the backbone of the economy, the fact is "successful companies...don’t exist in isolation." The example in the article is Apple, which Mitch Daniels praised for it's record of creating American jobs. However, Apple has very few people working for them in America. In fact, the vast majority of their workers are overseas, mostly in China.

And, as Krugman notes, it's not just because of lower wages. The reason places like China and Germany (which pays its workers much more than the US and still has higher exports) are taking our jobs is because of synergy between companies. In China, there are clusters of companies all together, and workers for them nearby. What that means is that it is much cheaper to gather the things needed to make products. Because these co-op type areas are so efficient, they can produce things at a faster, cheaper rate.

So, what can America do to compete? We could create these industrial clusters if we wanted. We could construct a large number of businesses that all operate for each other and fill them with workers. But the conservative mindset that was described by Daniels rejects that idea as being a moot point. It's single businesses, not collective groups, that drive the economy.

Krugman points to one other example: the auto bailout. The reason this was such a success can only be seen if you look at it from the perspective of all these industries being connected. Say the bailout hadn't happened, and GM and Chrysler had gone under. Well, the businesses that supplied their materials would also take a hit, meaning they would have suffered and possibly closed. Those same companies provided materials to Ford, meaning Ford may have collapsed as well. It's a domino effect that would have crippled the American economy and cost millions of jobs. Fortunately, it didn't happen.

So, co-opting business is a sound economic principle. Consider any company, and you will notice that that company can't exist without others. It's impossible without comoplete vertical integration (and even then, still difficult). If we can adopt this idea into our economic structure, and respond to industry with this kind of understanding, perhaps we could fashion better solutions to market problems.

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