The Financial Crisis in One Sentence

The smart college boy/college girl MBAs* who run investment banks and other businesses have less practical ability than a man who did not even finish high school. Henry Ford told us in 1922 exactly why a good 20-30 percent of our investments vaporized during the past several months, and he summarized the cause in one sentence:

    The primary functions are agriculture, manufacture, and transportation.

There are exactly three ways to create wealth: grow it, mine it, or make it. While transportation does not add actual value, one usually has to move whatever one grows, mines, or manufactures. Other activities, such as those in which Lehman Brothers and other failed institutions indulged, do not create value.

Here is the complete excerpt from My Life and Work (1922).

    The primary functions are agriculture, manufacture, and transportation. Community life is impossible without them. They hold the world together. Raising things, making things, and earning things are as primitive as human need and yet as modern as anything can be. They are of the essence of physical life. When they cease, community life ceases. Things do get out of shape in this present world under the present system, but we may hope for a betterment if the foundations stand sure. The great delusion is that one may change the foundation—usurp the part of destiny in the social process. The foundations of society are the men and means to grow things, to make things, and to carry things. As long as agriculture, manufacture, and transportation survive, the world can survive any economic or social change. As we serve our jobs we serve the world.

Nowhere do we see activities like flipping houses, using houses as sources of “cash,” trading carbon credits (as planned by Lehman Brothers), and importing junk from China for markup and resale at big box stores. The self-styled geniuses who ran Lehman Brothers and other collapsing companies were in fact under “the great delusion that one may change the foundation,” and that they could profit from activities that deliver absolutely no value to customers, or to society at large. They thought they could be paid for the organizational activity of breathing and occupying space in ornate office buildings–another extravagance for which Ford was explicitly unwilling to pay.

We also recall from our own MBA classes* a case study that involved the failed retail giant W.T. Grant. Grant’s salespeople received bonuses for sales, including credit sales. They also had the authority to issue credit cards to customers. Needless to say, they issued as many credit cards as possible without much if any effort to determine whether the applicants would be able to pay their bills. The banks that loaned money to home buyers and speculators, often with little or no money down, did pretty much the same thing on a much larger scale, and the consequences were easily foreseeable.

Our readers also should be aware of the Climate Action Partnership (CAP), whose agenda also involves getting paid for not creating value, or even for destroying it. CAP wants Congress to enact limits on carbon dioxide emissions, thus forcing businesses to buy so-called “green” products (e.g. solar panels, wind turbines) from General Electric, or to buy and sell carbon credits on which intermediaries like Lehman Brothers can “earn” commissions. Here is Kimberley Strassel’s exposure of the Climate Action Partnership for what it is.

In other words, many of CAP’s members expect to be paid for the equivalent of breathing or occupying office space as opposed to making money the old fashioned way (by creating products and services that a free market will buy). There was a time when General Electric would have engineered wind turbines and solar panels to get their prices down to where electricity from coal plants would be uncompetitive (at least during times of wind and daylight). Now, however, GE apparently wants Congress to force utilities to buy its products because it lacks the will or ability to perform actual engineering work. It stock price, which is off about 40 percent from its high of about $42 a year ago, probably reflects this attitude. Meanwhile, the list of CAP’s members tells its own story: note the real bunch of “winners” we have highlighted.

* Alcoa
* American International Group, Inc. (AIG)
* Boston Scientific Corporation
* BP America Inc.
* Caterpillar Inc.
* Chrysler LLC
* ConocoPhillips
* Deere & Company
* The Dow Chemical Company
* Duke Energy
* DuPont
* Environmental Defense [asks for donations]
* Exelon Corporation
* Ford Motor Company [Henry is doubtlessly turning in his grave]
* FPL Group, Inc.
* General Electric [stock price off 40% from its high of last year]
* General Motors Corp. [We are really glad we dumped our stock some time ago]
* Johnson & Johnson
* [Lehman Brothers, apparently deleted from the list after it went bankrupt]
* Marsh, Inc.
* National Wildlife Federation
* Natural Resources Defense Council
* The Nature Conservancy
* NRG Energy, Inc.
* PepsiCo
* Pew Center on Global Climate Change
* PG&E Corporation
* PNM Resources
* Rio Tinto
* Shell
* Siemens Corporation
* World Resources Institute
* Xerox Corporation

As reported by Strassel, even the manufacturing companies and utilities on the list apparently want to be paid for the organizational equivalent of breathing and occupying space:

    Four of the affiliates–Duke, PG&E, FPL and PNM Resources–are utilities that have made big bets on wind, hydroelectric and nuclear power. So a Kyoto program would reward them for simply enacting their business plan, and simultaneously sock it to their competitors. Duke also owns Cinergy, which relies heavily on dirty, CO2-emitting coal plants. But Cinergy will soon have to replace those plants with cleaner equipment. Under a Kyoto, it’ll get paid for its trouble.

    DuPont has been plunging into biofuels, the use of which would soar under a cap. Somebody has to cobble together all these complex trading deals, so say hello to Lehman Brothers. Caterpillar has invested heavily in new engines that generate “clean energy.” British Petroleum is mostly doing public penance for its dirty oil habit, but also gets a plug for its own biofuels venture.

    Finally, there’s General Electric, whose CEO Jeffrey Immelt these days spends as much time in Washington as Connecticut. GE makes all the solar equipment and wind turbines (at $2 million a pop) that utilities would have to buy under a climate regime. GE’s revenue from environmental products long ago passed the $10 billion mark, and it doesn’t take much “ecomagination” to see why Mr. Immelt is leading the pack of climate profiteers.

We are not sorry that the business world has said goodbye to Lehman Brothers because, if Strassel described its work ethic accurately, the business world is better without it. The bottom line is that people and businesses will buy cost-effective products and services, and that they will reject cost-ineffective ones. The government did not have to pass laws to get people to replace gas lights with safer and cheaper incandescent light bulbs, nor did it have to ban horses and buggies after Henry Ford made the Model T affordable to the middle class. It was probably cheaper, in fact, to keep a Model T than a horse, because a horse requires food even when it’s not working.

We remind General Motors and Ford that Toyota does not need government mandates to sell its Prius hybrid electric cars, because good engineering makes them cost-effective. They are so cost effective, in fact, that there is often a shortage of Priuses, unlike the GM products that seem to litter dealer lots at the end of every model year. It is doubtful that the Ford Motor Company would have been a CAP member under Henry Ford’s direction, although the company could probably have qualified for ISO 14000 registration in an era when Ford could have legally dumped into the river everything that wouldn’t go up his smokestack. Ford recognized environmental waste as wasted material resources, and he did everything possible to transform waste into products that people would buy (e.g. Kingsford charcoal was originally waste from his lumber operations), or to avoid making the waste in the first place. Good engineering and good business practices are more than a match for CAP’s and Albert Gore’s politically correct Jonestown Kool-Aid any day, and the free market has already rendered its own judgment on at least two of the Jonestown Kool-Aid vendors (AIG and Lehman Brothers).

* We have an MBA, but it’s on top of an engineering background so we know that a business has to actually create something of value to remain in business.

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