Wednesday, December 10, 2008

Cars vs. Pianos: What if FDR Had Bailed Out The Piano Industry in the 1930s As Demand Declined?

In 1960, we began to see the first major international challenge to what was left of the US piano industry. By 1970, Japan's production outstripped the United States, and it has been straight down ever sense. By 1980, Japan made twice as many as the United States. Then production shifted to Korea. Today China is the center of world piano production.

And what happened to the once-beloved American piano industry? Only Steinway survives to make luxury instruments that few can afford. The rest moved overseas under new ownership or were completely wiped out. Does anyone care that much? Not too many. Have we been devastated as a nation and a people because of it? Not at all. It was just a matter of the economic facts. The demand went down and production costs for the pianos that were wanted were much cheaper elsewhere.

In the same way, many people will bemoan the loss of the US car industry and wax eloquent on the glory days of the 1957 Chevy. But we need to deal with the reality that all that is in the past. Economics demands forward motion, a conforming to the facts on the ground and a relentless and realistic assessment of the relationship between cost and price, supply and demand. We must learn to love these forces in society because they are the only things that keep rationality alive in the way we use resources. Without them, there would be nothing but waste and chaos, and eventual starvation and death. We simply cannot live outside economic reality.

Let's say that FDR had initiated a bailout of the piano industry and then even taken it over and nationalized it. The same firms would have made the same pianos for decades and decades. But that wouldn't have stopped the Japanese industry from taking off in the 1960s and 1970s. Americans would have far preferred them because they would have been cheaper. American pianos, because they would be state owned, would fall in quality, lower and lower to the point that they would become like a Soviet car in the 1960s. Of course you could set up tariff barriers. That would have forced American pianos on us.

In the end you have to ask, is it really worth trillions in subsidies, vast tariffs, impositions all around, just to keep what you declare to be an essential industry alive? Well, eventually, as we have learned in the case of pianos, this is not essential. Things come and things go. Such is the world. Such is the forward motion of history in a world of relentless progress generated by the free market. Thank goodness that FDR didn't bother saving the US piano industry! As a result, Americans can get a huge range of instruments from all countries in the world at any price they are willing to pay.


~Jeffrey Tucker of the Mises Institute, "The End of the U.S. Piano Industry"


19 Comments:

At 12/10/2008 11:23 AM, Anonymous Machiavelli999 said...

You gotta love the Austrians. They make complex things look very simple. They do this by avoiding the truly complex questions. Such as...


Is it really worth it to sign free trade agreements with a large country that maintains an artificially low exchange rate, thus in effect massively subsidizing their manufacturing industry at the expense of our own. Is it really worth it to tie ourselves to this economy which uses its "profits" from subsidized manufacturing not to fuel consumption of its own, but to build up massive sovereign wealth funds which decide to flood our economy with capital. That in conjunction with a broken financial system and low interest rates leads to massive bubbles whose eventual pop leads to deep and long recessions.

And finally, is it really worth it to let an industry die which competes with heavily subsidized competition and whose death will lead to the collapse of whatever is remaining of our manufacturing base? Because if we ever sign sensible trading agreements and the world comes back into balance, we will need a manufacturing industry of our own. And it will take years, not decades, to rebuild the industry if the auto companies are still standing.


No, lets not consider these questions which require critical thinking. Lets just fall back on the all too easy, and many times over disproved, ideology of Austrian economics.

 
At 12/10/2008 11:33 AM, Anonymous Anonymous said...

"disproved" where again?

 
At 12/10/2008 11:35 AM, Blogger Mark J. Perry said...

"Is it really worth it to sign free trade agreements with a large country that maintains an artificially low exchange rate, thus in effect massively subsidizing their manufacturing industry at the expense of our own."

Alternative Translation: Is it really worth it to sign free trade agreements with a large country that maintains an artificially low exchange rate, thus in effect massively subsidizing U.S. CONSUMERS AND BUSINESSES WITH ARTIFICIALLY LOW PRICES AT the expense of THE CITZENS OF THE FOREIGN COUNTRY?

I would say YES.

 
At 12/10/2008 12:21 PM, Blogger Marko said...

Yes Mark! Thank you. Foreign subsidies make goods cheaper for U.S. workers, which is like a foreign government sending money into our pockets. Yes, it sucks to lose your job if you are in an industry that can't compete, but that has always been the case. Let foreign governments keep sending us money!

 
At 12/10/2008 1:01 PM, Anonymous Anonymous said...

No one is going to say that the US's ability to defend itself is diminished due to lack of piano manufacturers.

 
At 12/10/2008 2:39 PM, Blogger bobble said...

"Foreign subsidies make goods cheaper for U.S. workers . . ."

You're assuming that there are any U.S. workers left take advantage of that.

The free trade folks are *now* telling us they never promised we'd all do well, only that the country as a whole would do better.

What appears to have happened is that a small segment of the population did very well, and the rest, not so well.

Hey Mark and Marko, how are your 401K's doing? Still like the new economics?

 
At 12/10/2008 2:53 PM, Anonymous cddir said...

"No one is going to say that the US's ability to defend itself is diminished due to lack of piano manufacturers."

But the Big 3 sold-off all (most?) of their defense divisions. They don't really manufacture military equipment anymore.

 
At 12/10/2008 2:55 PM, Anonymous Machiavelli999 said...

Anonymous said...

"disproved" where again?

Well, first of all, its hard to disprove something where the people who are pushing the theory admit themselves that they have no evidence or mathematical models to prove what they are saying. Their claim is that human behavior is too complex to model with mathematical equations. Even if I believed this was true, it makes me even more skeptical that you can just "infer" what people's behavior to certain policies would be.

One of the biggest indictments against the Austrian school have actually been the events of the past few months. You might ask yourself: didn't guys like Ron Paul and Peter Schiff predict this?

Well, they did but for the wrong reasons. And the biggest evidence that they are wrong is the fact that Peter Schiff has lost a lot of money this year betting on hyper-inflation. While in fact, we will be begging for inflation in the coming years. Peter still claims that we will see high inflation soon, but he doesn't really understand things like liquidity traps.

He must only look back at the Great Depression and Japan. The financial crises were different from our own, but the responses were similar. 0% interest rates, massive government spending, and yet...NO INFLATION! In fact, massive deflation! How does this reconcile with the Austrian school of economic thought?

 
At 12/10/2008 4:07 PM, Blogger Marko said...

bobble said: "You're assuming that there are any U.S. workers left take advantage of that."

Good point bobble, I am sure you believe there very shortly the unemployment rate will rise to 100%. Brilliant.

By the way, my 401k dropped like a rock. Not sure what you think that means. Looks like business cycle to me - if people like you don't mess up the economy by making it even more socialist than it is now, I expect the value to go up. Right now, equities are on sale.

 
At 12/10/2008 4:24 PM, Blogger Michael Smith said...

0% interest rates, massive government spending, and yet...NO INFLATION! In fact, massive deflation! How does this reconcile with the Austrian school of economic thought?

Actually, what has happened is exactly what the Austrian theory predicts -- except that your description of what has happened omits a step.

We did have artificially low interest rates and massive government spending -- followed by a huge inflationary bubble in housing prices and inflationary increases in commodity prices, such as $4/gallon gasoline -- followed by the collapse of the housing bubble and declining commodity prices from declining demand as the economy fell into recession.

I’m not an expert on Austrian economic theory, but as near as I can tell, events have unfolded as Austrian business cycle theory predicts: an artificially generated expansion of credit by the central bank creates an unsustainable expansion (boom) in one or more sectors of the economy, followed by an inevitable contraction (bust) when the supply of people willing to use the credit is exhausted, with the magnitude of the boom and subsequent bust dependent on just how much the structure of production was distorted by the artificial expansion of credit.

 
At 12/10/2008 4:30 PM, Blogger Michael Smith said...

Hey Mark and Marko, how are your 401K's doing? Still like the new economics?

I'm not sure what you mean by the "new economics", but the recent downturn in the Dow that has seen it shrink from 13,000 to its present level of 8,700 or so began right about the time Obama secured enough delegates to guarantee him the Democratic nomination.

 
At 12/10/2008 4:40 PM, Anonymous Machiavelli999 said...

Lol,

Michael Smith just exposed himself as a person who knows nothing about the markets.

The belief that the market cares at all about who gets elected IS INSANE!

The financial system came on the brink of collapse, the real estate bubble burst, 1.8 million jobs have been lost so far, corporate profits are in free fall...

But the stock market doesn't care about ANY of that. No, its Obama's presidential campaign that the stock market cares about.

Oh, and btw, the market topped out in October 2007. At that point, Obama hadn't won a single delegate yet.

 
At 12/10/2008 4:42 PM, Anonymous Machiavelli999 said...

Also, Michael Smith

It is undeniable that Austrians like Ron Paul and Peter Schiff continue to believe we will have massive inflation.

There is NO INFLATION! There is deflation! And in fact, Ron Paul wrote in his book that deflation is actually a good thing.

So, by that statement alone, this is the best time America has had since the Great Depression.

 
At 12/10/2008 5:49 PM, Blogger Marko said...

Well, as long as my pay keeps going up or stays the same, and prices keep going down, I am all for that. Although I would like massive inflation, since I have lots of debt and that would help me too. I guess whatever happens, I tried to keep some money in the bank, keep my skills sharp and work hard to try to deal with it. Now if the government would just stop trying to "fix" things, things would get better sooner rather than later.

The only "new economy" I am seeing is creeping socialism that looks like it is about to take a big leap forward.

 
At 12/10/2008 9:08 PM, Blogger bobble said...

M.Smith:". . .the recent downturn in the Dow . . . began right about the time Obama secured enough delegates to guarantee him the Democratic nomination"

LOL, by that theory we can blame the dot.bomb crash on bush!

i read this blog and marvel how badly obama has already screwed up the economy, and he hasn't even taken office yet! desperate spin from folks who don't want to face the fact that excessive deregulation blew up in their faces (and 401K's).

 
At 12/11/2008 2:06 AM, Blogger wcw said...

Michael Smith is a troll.

Or a Turing test. I can't decide.

On-topic, Pianos? Pianos?! What percentage of GDP did piano manufacture represent at its pre-radio peak (I'm guessing 1925, but I could be wrong)? What percentage does auto manufacture represent today?

As a child of Austrian immigrants, I want to like the school, but crap like makes me ashamed they've taken my people's name.

 
At 12/11/2008 12:16 PM, Blogger Michael Smith said...

The financial system came on the brink of collapse, the real estate bubble burst, 1.8 million jobs have been lost so far, corporate profits are in free fall…

But the stock market doesn't care about ANY of that.

You must read more carefully. I didn't say that Obama's nomination is ALL that affects the market. Obviously, many factors affect the market.

Oh, and btw, the market topped out in October 2007. At that point, Obama hadn't won a single delegate yet.

Yes, it topped out in October 2007 at 14066, then by March of 2008 it had fallen back to 11,893. By May it had risen back to 13,058. It was right around that time that it became clear Obama would be the nominee. From that point on the market has declined by over 30%.

Does that prove that the decline was caused by Obama’s nomination? Certainly not, and I didn’t say that it did.

However, this is a very dubious statement:

The belief that the market cares at all about who gets elected IS INSANE!

At various times during the campaign, Obama promised the following:

- To raise the top income tax rate
- To raise the corporate tax rate
- To raise the dividend tax rate
- To raise the capital gains tax rate
- To create a new tax on businesses that outsource jobs overseas
- To seize a portion of the oil industry's profits to fund an "energy rebate" (to buy votes)
- To seize a portion of the pharmaceutical company's profits to lower drug prices (to buy votes)
- To "spread the wealth around"
- To eliminate the secret ballot and allow union organizers to bring intimidation and threats to bear directly on anyone who dares to oppose a union.
- To raise the minimum wage by 50%
- To impose "cap and trade" limits on CO2 emissions that will, in his words, "cause electricity rates to soar" and "bankrupt anyone who builds a coal-fired power plant".
- To force all businesses to pay 100% of their employee's healthcare costs
- To complete the nationalization of the healthcare industry
- To impose protectionist trade restrictions by "renegotiating" existing free trade agreements.
- To commit America to funding U.N. anti-poverty programs, so that American taxpayers are not only bled to fund our home-grown bums and deadbeats, but the who world’s as well.
- To raise a “civilian defense force” which, in his words is just as strong and well-funded as our military.

If something is “insane”, I’d say it’s the notion that profit-seeking investors are completely indifferent to the prospect of a President pursuing these policies.

 
At 12/11/2008 1:02 PM, Blogger Michael Smith said...

It is undeniable that Austrians like Ron Paul and Peter Schiff continue to believe we will have massive inflation.

So what? Your claim was that recent events were an "indictment" of the Austrian school. I simply showed that what the Austrian theory predicts will happen, has, in fact, happened.

There is NO INFLATION! There is deflation!

Only if your perspective is limited to the last few weeks. In January of 2000, the consumer price index stood at 168.8. At the end of September, 2008, it stood at 218.8, an increase of 29.6%. That’s inflation.

In October, the CPI declined to 216.6, a decrease of 1%. So, in your interpretation, a decrease of 1% cancels an increase of 29.6% -- it’s as if the 29.6% increase never occurred. But it DID occur -- so while you might be able to say there is no inflation at the moment, it is not correct to imply that there hasn‘t been any inflation.

Bear in mind also that, deflation -- as the Austrian school defines it -- does not mean “any drop in prices”. Rather it means an actual contraction of the money supply and as such is usually a very destructive thing. I have no idea in what sense Ron Paul is using the term but I wouldn’t assume that what you hear from him is representative of the Austrian school of economics as defined by people like Ludwig von Mises and George Reisman.

 
At 12/11/2008 9:03 PM, Blogger NBW said...

Machiavelli999, you're priceless. If you don't already have a seat in congress, you should sign up. You'll fit right in.

In the words of a great man "There are no easy answers but there are simple answers." Thanks, Gip.

nik-o-laus.blogspot.com

 

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