Fisher Investments Editorial Staff
Capitalism

The (French) Revolution Will Not Be Televised

By, 11/29/2012

France is seemingly learning some hard lessons in the difficulties socialism presents from a practical economic standpoint—exemplified clearly by the challenges one of the world’s largest steelmakers is facing. Briefly, the private sector–government stand-off began roughly two months ago when the company announced its intention to shut down two furnaces located in Florange which have sat idle for over a year—resulting in the loss of some 600 jobs or so.

The company says shutting down the furnaces is a business necessity because the economic slowdown in the eurozone has rendered them (at this point) overall unproductive. In shutting down those two furnaces, it could continue refining and finishing steel onsite using raw steel from more productive furnaces elsewhere. Alas, a solution the French government finds unacceptable, insisting it be allowed an opportunity to find a buyer for the furnaces prior to the company’s shutting them down. A well-intentioned enough objective, to be sure—but we’d venture to guess the company would’ve taken similar action were there a ready and willing buyer.

As it turns out, the French government has found buyers—provided not just the furnaces in question are for sale, but the whole site. An offer the company says is unacceptable because it will render many more of its operations uneconomic—after all, it still needs the refined, finished steel, but it can provide raw steel from furnaces located elsewhere.

Considering the company employs over 20,000 workers in France alone, it would seem rather ill-advised to make the whole company unprofitable for the sake of 600 jobs. In fact, economist Henry Hazlitt pointed out just such tendencies—to see mainly the immediate, short-term benefits to those clearly harmed at the expense of missing the broader, more damaging downstream effects to a larger group in the long term—in his Economics in One Lesson.

As the debate’s escalated, the French government’s tone has become increasingly strident—suggesting most recently the government may ultimately nationalize the plant to allow it more time to find a willing buyer. In our view, though, doing so would be a rather ominous signal to the rest of France’s private sector. Consider the implied message: If you, fill-in-the-blank private business, can’t continue operating at full capacity without cutting resources and consequently jobs, we, the French government, will nationalize what portion of your business we deem reasonable and necessary in order to preserve those jobs.

Following the logic through to its conclusion demonstrates the unintended consequences and the damage ultimately done, despite the government’s fine enough intentions. Assume the government nationalizes and does manage to sell the furnaces—so all those employees keep their jobs and the furnaces continue producing steel.

Because there’s now more steel available than the current level of global demand requires (which is why the furnaces were idle in the first place), all else equal, the price of steel will begin dropping. Which is certainly a benefit to companies for whom steel represents an input cost—maybe this is a win–win: Employees keep their jobs and businesses get cheaper steel!

But what about the companies for whom steel is a revenue source? Again, all else equal, those companies will become decreasingly profitable as the price continues falling. As that happens, they can decreasingly afford to employ people, ultimately likely resorting to lay-offs to preserve their bottom lines. In other words, the government’s effectively promoted an inefficient allocation of resources to steel production.

Granted, everything is not always equal—suppose, for example, economic growth resumes with gusto in Europe and steel demand rockets higher. In that case, though, as prices for steel rise (because there’s increased demand, meaning consumers are competing for an increasingly scarce supply), companies like the one in question will be incentivized to restart idle furnaces—or heck, build new ones. And those projects will make economic sense because they’re earning higher profits on their product. From there, guess what? They need to hire more people. And that, folks, is a win–win.

Either way, the result can come without government involvement—in fact, it likely comes faster and at an overall lower cost if the government isn’t involved. Politicians seemingly constantly forget the crucial role both prices and the profit motive play in an economy. Without the two, companies can’t function. And if companies can’t function, they can’t employ anyone. While economic adjustments can be painful in the interim and the impact on individuals certainly isn’t to be overlooked, we’d suggest countries and economies are far better off finding alternative ways to help those individuals transition than forcing companies to continue operating unprofitably. Taking the latter approach likely hurts far more in the long term and leads in the extreme to a centrally planned economy—which history has shown numerous times to be disastrous for those involved with and subject to it.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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