You are here: ET home > Current insights > Producer economics >The 110 year old clue
Elegant Technology

ET homeCurrent insightsElegant Technology definedHistorical contextAbout the authorend


The 110 year old clue

On why the USA auto industry bailout is so different from the bailout of Wall Street.

In 1899, Thorstein B. Veblen published his seminal work "The Theory of the Leisure Class." Modern readers find this a difficult book to read but it really does explain the absurd craziness of why the Obama economic team will shovel $100s of billions to Wall Street but will spend far less to keep General Motors afloat and treat their management to humiliating control. So at the risk of angering the Veblen purists, allow me to completely over-simplify that monumental work.

Veblen taught that class distinctions were best explained by cultural habituation. And for him, the most interesting set of habits were those of the Leisure Class. And so he describes the cultural markers that define the boundaries of those people "who fasten themselves on the backs of the productive classes to extract their livelihood through force and fraud."

He writes about amusing things like the costumes of the clergy or the architecture of banks. He introduces us to the ideas of conspicuous consumption--the habit of putting wealth on display, or conspicuous leisure--the practice of spending time and money engaging in sports to maintain simple muscle tone.

Here's where it gets interesting. Because the practices of the Leisure Class are cultural, there are rich AND poor members. For example, Veblen notes that probably no occupational category devotes a greater share of its income to the spending for Leisure Class respectability than poor college professors. (I would argue as the son of a small-town preacher that the clergy are probably even worse in that respect.)

Because the Leisure Classes consider themselves in charge of culture, they are the folks who run the religions, compose the music, write the literature, organize the armies, write the laws, and conduct the foreign policy. These are the folks who spend every waking hour attempting to be respectable--not surprisingly, some of them get pretty good at it.

So what's the problem? The problem is that the Leisure Class is absolutely terrible at running an economy. And for good reasons. It is an economics predicated on waste so it is environmentally unsustainable. And of course, there is always a limit to how many folks can live off the efforts of others before the whole enterprise collapses.

In the background of any leisure-class society MUST be the folks who do the work of growing the food, building the houses, and maintaining the infrastructure. Yet even though these industrial classes are absolutely essential and definitely deserve the lion's share of the economic pie, only the rare selected members (such as engineers) are fairly paid. The great triumph of the Leisure Class is that MANY of its members are paid premium "wages" for doing things that are DESIGNED to be economically useless. That's what controlling the culture will get you.

Of all the accomplishments of the industrial classes, arguably the greatest triumph is the mass-produced automobile. The distilled genius that is an automobile is an amazing bargain--if a $25,000 car was produced by the folks who price medicine, or law, or military hardware in USA, for example, it would cost millions. Even entry-level cars are brilliant accomplishments while something like a Lexus LS is so amazing, one wonders how mere mortals can actually build one.

Because the mass-produced automobile has changed the culture from city planning to sex, it is a direct threat to this essential pillar of Leisure Class power. The revolutionary cultural assault posed by the automobile is manifest at many levels. For example, when the Leisure Class ran things, the world's greatest sculptors carved statuary for the church--now they shape fenders for Ferrari.

The Leisure Class is mostly amused by the cultural manifestations of the automobile—sneering at them like they do with car songs. But it is the automobile industry’s cultural assault on economics that cannot be tolerated.

The economic assault on Leisure Class economics was deliberate. Henry Ford was the guy who decided to make the automobile affordable to the great masses AND pay high enough wages so his workers could buy his cars. He utterly detested the Wall Street games that were being played in Detroit and especially in the formation of General Motors. At one point he responded to the idea that he take Ford Motor public by saying that he "...would rather disassemble River Rouge with his bare hands, brick by brick, than have it fall into the hands of some scheming Wall Street speculators." When he finally did incorporate Ford, the arrangement was so arcane, it is still highly resistant to speculative attacks. Notice that in 2009, Ford is not one of the folks asking for a bailout.

General Motors did in fact collapse in 1920 because it was being run by a stock-scheming crook named William Crapo Durant. Fortunately, one of the major stockholders was the DuPont family who insisted GM be run by grown-ups and installed the legendary Alfred Sloan to fix the mess. Sloan combined the mechanical genius of Ford with an engineering degree from MIT. By the time he retired, GM was the largest corporation in the world with millions of intensely loyal customers.

In 1953, then GM president Charles “Engine Charlie” Wilson said in his confirmation hearing for Secretary of Defense that he would have no conflict of interest "because for years I thought what was good for the country was good for General Motors and vice versa". The head of the most complex industrial company in the most advanced industrial country in history may have sounded arrogant, but compared to his accomplishment in the most complex endeavor ever attempted by humans that is the motor vehicle industry, “Engine Charlie” was being rather modest. His Industrial Class had redefined economics and power itself.

But the Leisure Classes had not run human institutions since the dawn of recorded history by accident. They are very resourceful and cunning and even so powerful a juggernaut as the automobile industry could seemingly be contained—especially on the cultural turf. And so the assault began on a broad front.

Amazingly, the Leisure Class managed to discredit the genius required to make a motor vehicle. By high school, the high achieving students in USA have already internalized the idea that the ability to actually maintain or modify a car placed that person in a dirty, low-status crowd. Only the scum of the earth enjoy motorsports or read car magazines.

At the university level, we are taught that the automobile is responsible for the world’s ills from environmental ruin to urban sprawl, from workplace alienation to political corruption. While much of the critique of the automobile’s impact on the culture is valid, some is purest nonsense. For example, even though working on an automobile assembly line is extremely demanding both physically and mentally, such workers are portrayed by the Leisure Class as overpaid loafers whose basic struggle is with boredom.

But if the Leisure Class assault on the automotive world were merely confined to scorn and scoffing or lying and misinformation, there would have been no rollback. While Ford Motor managed to insulate itself from the predatory attacks from the moneychangers, the rest of the industry did not.

Here’s why this is a problem. The Leisure Classes essentially have no interest in the actual problems of making a car—they just want to maximize their return on their stocks and bonds. Virtually everyone agrees that a primary goal of the car-maker is to trim costs and maximize resource efficiency. But in the continuous battle between manufacturing, who want to spend for premium materials and tools, and the demands of the investors, lines get crossed.

The most common place where Leisure Class interests push automakers into doing what the rest of society would prefer them not to do is in their dealings with the environment. In fact, it could be argued that almost any environmental progress that auto industry has made is due to outside legal pressure or a happy accident resulting from efforts to increase material efficiency.

The Leisure Classes also have made demands of the automakers to drive down wage costs. This demand has profoundly poisoned the manufacturing side by diverting skills necessary for building a better product into outsourcing, offshoring, and generally moving factories around the globe. Worse, success in driving down wages has the nasty side effect of driving down demand—just as Ford had predicted.

But the best example of a Leisure Class interference with an Industrial Class activity happens in the arcane world of “thrifting.” Suppose your design crew has come up with a new and improved air conditioner bracket. It does the job and can be manufactured using known methods. Now the job is to make this part to specifications at the lowest possible cost—that’s thrifting. And it is utterly essential to make this complex product affordable. But when thrifting is taken too far, the result is a part that fails prematurely, and usually very expensively for the now-furious consumer.

What is so interesting about automobile manufacture is that the companies that have somehow limited their Leisure Class interference are the ones with the premium reputations. In Japan, it’s the companies who are named for their founders—Honda and Toyota. These companies have mastered the art of knowing when to stop thrifting in part because they have developed corporate cultures so powerful, Leisure Class interference is almost unheard of.

So the question is, if Leisure Class values are so damaging to an industrial company, and virtually everyone in an Industrial Class company should understand this, how do Leisure Class values manage to infect an Industrial-Class giant like a motor vehicle manufacturer? The answer has two parts: 1) The investor community wants their interests reflected in management, and 2) Even an Industrial company has Leisure Class jobs in their accounting, legal, and most especially sales and marketing departments. It turns out that while Leisure Class types may be terrible at manufacturing a car, they are almost essential to selling them.

And so the Leisure Classes managed to take over management positions in the automobile industry. Lynn Townsend at Chrysler, the guy who once fired his engineering department to meet some quarterly profit target but somehow found the resources to buy a stake in the French automaking “powerhouse” Simca (you cannot make this shit up) came from the legal department. Roger Smith at GM, the thrifting zealot who destroyed his company’s market share one enraged customer at a time, came from accounting.

This list is long and depressing. In fact, the car guys who are still wedded to the quaint notion that if they “build great products, the customers will find them” are now the exception in the management of our greatest industrial companies. The most recent example of a car company in USA actually being run by an Industrial Class mind would be Donald Petersen at Ford during a brief period of enlightenment between 1985 and 1990.

Flash forward to 2009. The car companies have hit the wall. Sales of virtually all car lines have collapsed world wide and MOST of the causes (crashing credit markets, last summer’s scary spike in oil prices, etc.) have nothing whatsoever to do with the car companies themselves. Even sainted Lexus, the branch of Toyota that Consumer’s Reports solemnly assures their readers makes the best automobiles in the world, have seen its sales plummet by 40%. So even the automakers who have kept their eyes on the ball are in trouble.

The Leisure Class bankers who caused the financial catastrophe are given virtually everything they have asked for. But when it came time for that perennial target of Leisure Class scorn, the automakers, to come to Washington to ask for money to tide them over an economic crises they did not cause, suddenly every minor figure in Washington had some sort of reason to beat up on an auto executive.

Why weren’t American car makers building electric cars? (real answer: because no one on planet earth knows how to build one that folks can actually afford to buy.) Why were the car companies paying their employees so much? (real answer: because they are doing very difficult work and high wages are a good thing.) Why weren’t Ford GM, and Chrysler building better cars like Honda and Toyota? (real answer: notice that even Toyota’s Lexus has seen it sales collapse and besides, the former Big Three are making some VERY desirable vehicles.) Why did the Big Three make and sell gas-guzzlers when they could have been making environmentally “ethical” cars like Prius? (real answer: because they conformed to the Leisure Class canon of conspicuous waste, SUV’s were a LOT easier to sell, making those Leisure Class investors insanely rich.)

So yes indeed, there are powerful cultural reasons why the bankers who caused the current economic mess are treated MUCH better in the halls of Congress than the those “dirty” automakers who are essentially innocent bystanders. Veblen was right about the conflicts between the Leisure and Industrial classes. And for all the power of the automobile industry, and for all the Leisure Class suck-ups that have wormed their way into the upper management, the fact remains that Industrial Class power is recent, fragile, and is now fading.

And if the folks in Michigan and Ohio, and the rest of the spots in USA where cars and components are designed and produced, aren’t extremely angry at the assault on their culture, it would be a monumental surprise. One can only hope they know their Veblen so they can understand the nature of the attack on their way of life.


Similar pages and video

The direct link to the Elegant Technology .pdf file.

“Creating Prosperity” which highlights the differences between the current economy and the one some of us fondly remember from 1970. (VIDEO)

The jump-off point for the intellectual tributes to Thorstein Veblen (1857-1929)

The Greatest Generation--economics division. Why economics used to be better.

Economics: A Matter of Life or Death--a thumbnail sketch of the difference between finance and industrial capitalism

modify datebloglinkall videosall pdf filescontact usend