Bob Thomas: Recessions are one of capitalism’s costs
For the Nevada Appeal
“If all economists were laid end to end, they would not reach a conclusion.” – G.B. Shaw.
For as long as I can remember, economists have been arguing over whether capitalism with its recurring recessions, or communist central planning with its chronic shortages of what citizens want, and overages of what government wants, is the superior economic system.
The problem with central planning is that committees, no matter how intelligent or well educated, are not clairvoyant enough to foresee what goods will be needed three to five years in advance. Because of changing conditions, they are always out of sync with reality.
So, what happens in China and North Korea, and what happened in the old Soviet Union? Central planners concentrate on government’s needs at the expense of what consumers want. Except for basic staples, no one can accurately predict the mix of needed and/or wanted products three to five years into the future.
I remember the old Fox movie theater newsreels in the 1930s and late ’40s showing the results of the Soviet Union’s latest five-year plan, and every year the Soviets overproduced half of what they needed and under-produced the other half. Soviet citizens had no say in the matter. Capitalism is the only system responsive to market demands. It was earlier adopted by Russia and is now being adopted by China.
But on the negative side, we capitalists still have those pesky recessions to contend with. And while academia has its theories, it misses the root cause of most recessions. Milton Friedman, my good acquaintance now in heaven, formerly of the University of Chicago, who saved the monetary systems of several countries in Europe and South America, taught that economics is a simple discipline, only made complicated by economists.
Now, getting back to those recurring recessions, it should be obvious and mathematically provable that periodically in capitalist societies a natural phenomenon occurs – call it an unwelcome coincidence – where simultaneously the majority of households have acquired everything they need. They may dream of future toys or a new home or car, but for the time being they are content, and it isn’t because their credit cards are maxed out. Remember, in this current recession, citizens were still employed when they stopped buying. They had jobs and most likely savings. They simply didn’t need or want anything. Overproduction is capitalism’s curse because companies don’t cut back on production until people quit buying. This respite can surely cause a mini-recession, which will cure itself with minimal losses of employment if government will just stay out of the way. Hasty governmental intervention is what triggers a full-blown recession, knocking natural market forces out of balance.
To support my hypothesis I’ll tell you a true story about how mathematical probabilities might be applied to predict when society will be temporarily “bought out.” Back in 1956, Convair Pomona in Pomona, Calif., one of my customers, designed and produced a shipboard antiaircraft missile known as the Tartar. It was about 12 feet long, 2 feet in diameter and loaded with electronics. My company supplied two key internal systems.
Well, Convair’s reliability engineers ran mean-time-to-failure tests on all of the internal components and systems. Their calculations suggested it was probable that one production missile would never pass final test because of a sequence of internal system and component failures that would occur, and this could happen within the coming year. Sure enough, it happened two months later. That bird never saw Navy service. Convair ate one Tartar.
By gathering data on American buying cycles, a good computer model should be able to forecast coming recessions. Such an exercise is enough to make most economists salivate.
• Bob Thomas was the founder and CEO of a high-tech division of Emerson Process, a Fortune “500” company. Later he served on the Carson City School Board, the Nevada State Welfare Board and as a state assemblyman. He also founded and served on the Carson City Airport Authority, and recently authored the book, “Creating A World Class Company” (Amazon)