Calculators, Railroads and Spam: Some Thoughts on Regulation and Innovation

Posted on July 19, 2011

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Check out this video of Milton Friedman talking about a calculator and the railroads:

The oversized LCD calculator that Friedman displays in the beginning does a lot to date the video, but anybody with any experience in the interminable and politically polarized dispute over government interference in the market will know that the argument he makes is timeless. The concept of innovation is a staple of economic thought on all sides of the political spectrum, but it is conservative politicians and think tanks that use it most aggressively. continually warning us that we tax and regulate the business sector at our own peril. By placing restrictions on free enterprise, they argue, we are placing restrictions the activities of those who, through their own selfishness, make life better for all of us. If you haven’t heard this line of argument then you have probably never talked to a libertarian. It’s basically the entire plot of the right’s favourite book.

Friedman’s argument is somewhat flawed. The role of government in the design and production of the calculator he holds is far from ‘very little’. Pocket calculators would have taken much longer to design without an educational system, patent protection, and a generally stable society in which one can make a living by designing consumer electronics. His cherrypicking of the railroad industry as an example of the hazards of regulation is also a bit fallacious, but that’s a more complex argument for another post. Beyond those small issues, Friedman is mostly correct. The computer I’m typing on, the website that supports my content, and the fancy shorts I just wore out for a run are all things that I appreciate being in my life, and were all designed by profit-motivated people. There is little doubt that the free market has a role to play in fostering all forms of innovation, and that that innovation has a role to play in improving society.

Should that mean, however, that the need to foster innovation should trump our legitimate desire to regulate the activity of private  Keep that in mind as you read this Mother Jones article about the Spam factory. It’s gross, but not for the reason you might expect. It’s long, but it’s a fantastic piece of journalism and I highly recommend reading it for reasons that go well beyond this particular discussion. In any case, the relevant part of the article is the following quote:

“Chidester says he witnessed a lot of dirty tricks meant to double-cross the unions. The Wilson Foods pork-processing plant in neighboring Albert Lea filed for bankruptcy in 1983 in order to nullify existing contracts and cut workers’ average pay from $10.69 an hour to $6.50. With improved margins, owners were able to sell the company at a sizable profit.

Then, in November 1987, barely a year after the conditions of [a recent] strike resolution were made official, Hormel announced a shutdown of nearly half of the new plant. Hormel would continue to operate the packaging operation on the refrigerated (“cold”) side, but the cut-and-kill (“hot side”) would be taken over by Quality Pork Processors Inc. QPP then existed only on paper but was headed by Richard C. Knight, a former executive at Swift, the Chicago-based meatpacker that pioneered the conveyor line and had a major plant in nearby Albert Lea.

Knight claimed his new company would be separate from Hormel, though QPP would buy exclusively Hormel hogs and sell the butchered meat exclusively back to Hormel. They would use Hormel’s space and Hormel-owned equipment, rely on the Hormel mechanics, drive Hormel forklifts. The newly dubbed Local 9 felt this was a union-busting tactic and asserted that 550 former strikers still on the preferential recall list were entitled to the new jobs created by the subcontract—and at the wages the union had just agreed to, not the $6 to $8 an hour now being offered. Hormel denied this and, to make its point, erected a wall in the middle of the plant to divide Hormel from QPP. Eventually it would add a separate entrance and run a chain-link fence through the center of the parking lot. “It’s kind of like taking a room in the middle of a house,” Chidester told me, “and saying it’s not really part of the house.”*

Local 9’s attorney asked the St. Paul Pioneer Press: “What good is a union contract if the company can avoid the contract by simply leasing its premises to another company and get the work done at non-union rates?”

Filing for bankruptcy as a way nullify contracts. Setting up a shell corporation so that they can hire non-unionized employees. Pretty nasty stuff. But as you read the story of how Hormel dismantled some of the most progressive labour policies in the industry in the quest to deliver delicious pork to hungry mouths at maximum profit margins, think about what Milton Friedman said. The free market drives selfish people to innovate and thereby produces better quality products for lower prices. Technology is what normally comes to mind when economists talk about this effect, but there is nothing saying that all innovation must be technological. Hormel’s creative ways of screwing its staff are a form of innovation. Hormel was trying to compete on price rather than quality, and while money can be saved by improving a piece of equipment or designing a better assembly line, it can also be saved by finding ways to pay lower wages. Just as Boeing must innovate around the laws of physics to make faster planes, so Hormel decided to innovate around labour laws to make cheaper workers.

This does not entirely invalidate Friedman’s argument. The free market, acting through innovation, remains a great way to produce new and better technologies and industrial techniques. But just as a company can innovate its technology or procedures to produce a better or cheaper product, a company can also innovate its organization to produce a cheaper product through screwing its workers, skirting environmental regulations or skimping on safety. Distribution can be improved through the innovation of manipulative advertising that preys on peoples’ insecurities. Even improvements in quality are not all good. The recent News of the World Scandal is the result of a particularly cutthroat innovation designed by greedy people intent on improving their media product by getting a shortcut to the juiciest bits of gossip. Long story short: Not all innovation is good.

Unfortunately, bad innovations are frequently easier to make than good ones. That’s why we need government involvement in the economy. Business legislation is an active process of blocking innovations that do not help society, while encouraging those that do. When Friedmanites accuse us of stifling innovation, they are partially right. What they fail to realize is that some innovation deserves to be stifled.

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