Mises Daily Articles
The Tire Fiasco
The Firestone/Ford tire debacle will likely serve to bolster one of the most widely accepted and pernicious economic fallacies. According to this fallacy, the free market is unique among institutions, in that its profit motive encourages businesses to increase profits by cutting costs at the expense of the public.
Thus, we can expect to hear that Firestone slashed labor costs or R & D costs, or whatever costs, on tires, in order to increase its profits. Businesses therefore, in the words of leftist sloganeering, "put profits before people." Thus, profits have to be restricted and businesses regulated by (non-profit-seeking) politicians, bureaucrats and self-appointed consumer advocates. Fortunately, the Austrian theory of the nature of cost and profit allows us to dissect and refute this popular fallacy.
It is true that market actors seek to make profits. These profits generally come in the form of monetary gain: the excess of revenue over expenses. Since this "profit" takes the form of a quantity of money, the leftist concludes that the pursuit of monetary profit, the prime motive of entrepreneurs, is the villain in a wide variety of sins attributed to businesses such as dangerous products, pollution, and the "exploitation" of labor.
A closer look at the actual motivation of the capitalist or entrepreneur, however, leads the analysis in a different direction. The profit sought by the capitalist is not ultimately monetary, but subjective or psychic. You can’t eat, drive or live in money. The capitalist seeks a monetary profit so that he can save funds for the future consumption of goods and services and spend money presently on such things, because of the subjective or psychic satisfaction these goods and services provide. In short, the capitalist seeks happiness.
The pursuit of happiness is the villain that leads some people to do bad things to others in the process. By "happiness", I mean whatever goals or ends or values an individual believes the achievement of which will provide satisfaction or remove discomfort. Logically, the leftist should formulate legislation to prohibit the pursuit of happiness. The problem is that the only way to do so is to exterminate people since people by their very nature pursue happiness. This is a problem that leftists in the twentieth century managed to overcome with remarkable efficiency. Significantly, these leftist exterminations--taking perhaps eighty-five million lives--were usually accompanied by condemnations of the profit motive.
The other critical element in the leftist fallacy, costs, is also a subjective entity and a feature of all human action. The capitalist seeks to reduce monetary expense so that he will have more funds to purchase goods and services which he expects will bring happiness. Cost is not ultimately monetary. For example, the cost of a loaf of bread is the subjectively felt loss of the goods one cannot acquire because of the purchase of the bread. Cost is a feature not only of capitalist pursuits, but of all pursuits. All goal-oriented behavior is costly, that is, involves the expenditure of scarce time, energy, land, labor and capital which then becomes unavailable for the pursuit of other goals. Anyone pursuing goals of whatever kind wishes to minimize the costs and thus may be tempted to impose those costs on others.
Consider the self-appointed consumer advocate who wishes to reduce the risk of death from pharmaceutical drugs. He faces numerous options with various degrees of cost. He can (1) form a private firm which will certify the safety of drugs; (2) educate consumers on the proper use of these drugs; (3) start a drug company and develop safer drugs; (4) get a degree in pharmacology and do drug research; or (5) start a gym and encourage people to exercise so they need fewer drugs.
All of these options require great expenditures of time, energy, and capital by our would-be do-gooder. There is, however, another option by which the do-gooder can seek his profit. He can use the government to make other people pay the costs necessary to achieve his goal. He can start up an FDA and greatly increase the time and money needed to develop new drugs. Without conceding here that by doing so he has in fact accomplished his goal, what is beyond dispute is that he has imposed on others the costs of that "accomplishment." Taxpayers pay the out-of-pocket costs; drug companies and their shareholders pay the increased development costs and they lose profits; and thousands of anonymous persons die or get sick because the FDA prevents new drugs from being sold to them. The self-appointed do-gooder has put his own profit over people.
The central conundrum of civilization is how to prevent people from imposing the costs of their activities on unwilling others. Civilization has yet to solve this problem, however, because it has not solved the problem of modern mostitarian government. Since government has the power to tax, inflate, conscript, compel, prohibit, and regulate virtually all economic activity, it is the classic means by which people can impose on others the costs of their activities.
For example, FDR wanted to be re-elected in 1936 (his "profit"). He decided that goal would be aided by buying the votes of elderly Americans so he created a taxpayer-financed retirement system: Social Security. FDR was able to impose the costs of this expensive program onto present and future taxpayers such as this writer. I now pay 15.3 percent of the first $76,200 of my net business income to the government as my involuntary contribution to FDR’s successful re-election campaign. This example illustrates the subjective nature of profit. FDR did not seek a monetary profit; the funds collected and paid out did not go into his own bank account. Rather, he sought a subjective profit in the form of increased power, prestige, acclaim, and the illusion of do-gooding.
Thus, the very nature of government is that it is an agency used by some to profit at the expense of others. Government systematically and continually imposes the costs of its activities on unwilling persons. It puts profit over people. In contrast, a private business lacks the coercive powers of government. It must deal with others on a voluntary basis by appealing to their self-interest. Firms which make the most profits are those which supply the best products to the most people for the longest period of time. Firms which sell shoddy or dangerous goods will tend to lose profits over time and will suffer declines in the value of their firms.
That is likely to happen to Firestone and Ford presently. Thus, while both politicians and businessmen may wish to impose their costs onto third parties, politicians have vastly greater powers to do so. Further, since the government is a monopoly, with an army available to put competitors out of business, the victims of its cost-imposing profiteering have no practical recourse. In sharp contrast, when one company sells shoddy goods, consumers will patronize competing businesses.
This is happening now in the tire and automobile industries. In this way, problems in the market are self-correcting. Anytime there is dissatisfaction with existing goods or services, a new market opportunity is created for alert entrepreneurs to provide new or better goods and services to satisfy the need. For example, the proliferation of restaurants in the last fifty years led to a demand for quality control and uniformity. The market responded by creating a wide variety of restaurant review and rating services and by establishing national restaurant chains that served a consistent quality of food regardless of location.
Government problems, in contrast, are not self-correcting, but self-promoting. Governments create their own demand by causing problems which increase the demand for further government action. Government intervention into the health care industry over many decades has greatly increased the cost of health care beyond the ability of millions to pay for it. That created an electoral demand for even further intervention into that industry. We are now on our way to some form of socialized prescription drug program, which in the long run will likely create shortages of drugs and stifle innovation, which will stimulate demands for even further government intervention.
Governments, unrestrained by competition, generally expand ad infinitum until they consume or destroy the societies upon which they prey. Too bad there is no way to recall the defective products of politicians such as inflation, tax slavery, war, and nuclear weapons. No, we can only escape from greedy governmental profit seeking by dying or moving into an obscure cave near the top of a high mountain in northwestern Montana.
It will be a long time before we know the true nature and cause of the problems plaguing Firestone tires. This much we do know. In July of 1998, the federal bureaucracy charged with tire safety--the National Highway Traffic Safety Administration--received information that there might be a problem with Firestone tires. They received further information in mid-1999. Acting at the typical bureaucratic glacial pace, NHTSA commenced an investigation on May 2, 2000. Firestone announced its voluntary recall on August 9, 2000.
Who provided the information that instigated the current recall? Who acted to protect the consumer? None other than "greedy", profit-seeking State Farm Insurance Company. Eager to earn ever higher profits by reducing injury claims and lawsuits, State Farm’s statistical bureau noticed an increase in claims related to Firestone tires and passed the information along to the NHTSA which had been asleep at the switch. [See, D. Spurgeon, "State Farm researcher’s sleuthing helped prompt Firestone recall", Wall Street Journal (Sept. 1, 2000).] The profit seeking of a big, bad, private insurance company may help save hundreds of lives.