The Free Market 24, no. 6 (July 2004)
Jim Cantalupo was CEO and Chairman of McDonald’s when he died unexpectedly on April 19th. In the weeks that passed after his death, noted Don Boudreaux, McDonald’s continued to supply Big Macs, Egg McMuffins, and its other menu items to hordes of customers. No changes in McDonald's operations were evident to the general public. The news of the death might sadden us, but it doesn't cause us to worry about where our next hamburger will come from.
But this phenomenon is precisely the opposite of what I observed when I arrived in Iraq in June of 2003, when I worked with an American contractor in rebuilding efforts. With the ousting of head man Saddam Hussein, the production of security completely collapsed. While I saw burgeoning businesses in fence building, satellite dish installations, used car sales, and agriculture in southern Iraq, the production of security floundered. All property and life was suddenly vulnerable to violation. Anything seemed possible.
This is another feature chalked up to the bureaucratic management style of socialism. Without the directions and payments from above, the state-supplied industries ceased to function as quickly as the regime fell. This is not to say that private markets cannot provide security; indeed the private sector took Herculean efforts to rush to fill the void. But because the sector had been completely nationalized by the state, it operated based not on profit and loss but on command and control.
The same was true for the state-run monopoly of heavy industry, which continues to be run in top-down fashion from the Ministry of Oil. With the arrival of the Army Corps of Engineers, it was even more interesting. For, one had two parallel command-control structures that were fighting at several levels for ultimate control.
Disputes over the best allocation of resources abounded (all of these were actual cases I observed firsthand between June and November 2003):
- Should water pipeline A's holes be repaired, and if so, what about the ongoing security on the pipeline to prevent future taps?
- If a pump is down, should we send for it to be repaired immediately in Kuwait at high cost, or can we do with the spare pump's lower capacity and reliability?
- There was a small pool of welders. How should they be distributed to different sites to work on various projects? Should more welders be brought in from Kuwait?
- At site X, should the highest-priority effort be put into the short-term importation of gasoline, kerosene, or fuel oil? Should we subcontract construction to locals (who work slowly, and are less familiar with high standards of quality), or to a Kuwaiti company (who work long hours, are highly productive, are familiar with all of the latest industry standards, but are more expensive)?
- The loading arms (for sending out product) must be repaired in preparation to export LPG when a surplus is finally produced (at the time, and currently, domestic production is still in deficit with respect to local demand). Should this project go forward? When should construction begin?
These and other issues were the topic of endless wrangles between the Corp of Engineers and the Oil Ministry. I never saw one that was decided based upon economic calculation, the typical procedure in private heavy industry, where a report is produced with expected market conditions and costs, showing the expected profit or loss with each alternative investment of resources.
It did not help things that, with the bureaucratic shakeup that the invasion and occupation caused, everyone within the Oil Ministry structure, all the way from the top to the bottom, was jockeying for a position with more power and prestige than before: bureaucratic turf wars.
You can easily guess that this caused economic chaos: low productivity, people acting at cross purposes, people acting on widely different assumptions, shortages and surpluses of labor and materials: in short, the malinvestment of resources and unrelenting waste and mismanagement.
In the private sector, the system of profit and loss serves as a yardstick by which to measure success or failure. It provides guidance on how to achieve results at least cost, and a feedback mechanism for testing after the fact. Competitive pressures serve to diffuse control while rivalry inspires excellence.
Private enterprise using the division of labor allows people to work together. It imposes a coordinative discipline that is always lacking from command-and-control structures. This, I think, is one of the long-term problems that will haunt the security and heavy industries of Iraq. It also haunts the US in all sectors in which the state is dominant. The prospect of a sudden death at the top worries us in ways that it would not if the same happened in the private sector.
Why? Under socialism, if the control structure is decapitated (to use the current language), the entire system ceases to function. Under capitalism, the web of operation is so extensive and so complicated that it can absorb unexpected tragedies, even catastrophic ones. There may also be a lesson here for social and military strategy. The best way to absorb a military invasion is to keep as much control out of the head of state as possible. A society without anyone or anything to decapitate stands the best chance of reconstruction and recovery.
Gil Guillory is a chemical engineer in Texas. Gil.Guillory@earthlink.net
