Later On

A blog written for those whose interests more or less match mine.

One problem with Capitalism

with 3 comments

Capitalism has strengths and also weaknesses. No surprise there. One weakness, however, seems built into the system: the drive to increase profits, which leads directly to cutting costs (since $1 reduction in costs drops directly to the bottom line to become $1 more in profits, whereas $1 increase in sales generally results in much less than $1 in profit, since costs of materials, production, distribution, marketing, and sales must be subtracted, with the profit being what’s left after those costs are taken out.

Thus in the drive to increase profits—a basic drive for any capitalist corporation—results in a corresponding strong drive to cut costs. (This is why the quality of care of for-profit hospitals is often inferior: staff reductions, cuts on upgrades (unless the upgrade will more than pay for itself in one calendar quarter), and so on means the quality of care suffers. Some states do not allow hospitals to operate as a profit-making enterprise.)

Take a look at airlines. It has now been well documented that the service and seating in Economy class is deliberately quite poor: if you make it bad enough, people will pay extra to get any small improvement. But the drive to cut costs in airlines also impacts overall service.

Tim Johnson and Curtis Tate report for McClatchy:

Flying these days is safer than ever, but a power outage that led Delta Air Lines to cancel more than 650 flights worldwide Monday shows that passengers are enduring more delays and misery than ever.

The massive worldwide disruptions for Atlanta-based Delta came less than three weeks after Southwest Airlines canceled or delayed thousands of flights because of what it said was a computer router problem.

In both cases, the airlines blamed equipment that is neither particularly complex nor costly, and outside experts discarded the possibility that computer hackers might have caused the outage.

Instead, several said the failures at Delta and Southwest underscore a lack of spending on redundant systems that can absorb shocks and switch to back-ups, even as the airlines are racking up record profits.

Georgia Power, the utility that provides power to Delta’s headquarters, said Monday’s outage was triggered by the failure of a piece of electrical equipment known as a switch gear located within Delta’s facilities and controlled by the airline.

“In layman’s terms, it is like a fuse box. That’s what failed, and that’s what caused Delta’s outage,” said Craig Bell, a spokesman for Georgia Power, a subsidiary of Southern Co.

“This is almost unforgiveable,” said Mark Weatherford, a senior adviser to the Chertoff Group, a Washington-based risk management and security consulting company. “How do you have a power outage? Every company should have redundant power. This is a big deal.”

Delta chief executive Ed Bastian apologized to passengers and said company teams were “working around the clock to restore our capabilities.”

By late afternoon, the airline said it had canceled more than 650 of its nearly 6,000 daily flights.

Delta said in a statement that the power outage began at around 2:30 a.m. and “impacted Delta computer systems and operations worldwide.”

The Southwest Airlines outage hit July 20 and lasted about 12 hours, forcing the airline to cancel 2,300 flights over a five-day period and delay thousands more flights. The company blamed faulty routers for the disruption.

But the pilots’ and mechanics’ unions said Southwest’s chief executive had put too much focus on containing costs rather than upgrading outdated computer equipment. They demanded the ouster of chief executive Gary Kelly and chief operating officer Mike Van de Ven.

That didn’t happen.

Two major failures by two of the nation’s largest airlines in less than a month raise uncomfortable questions about what role, if any, the federal government should take to ensure that airlines operate efficiently and without undue burden on passengers.

“The person that ultimately takes it on the chin is the Southwest customer or the Delta customer. When I look at corporate boards of directors’ responsibility, I say, ‘Shame on you. You didn’t have backups,’ ” said William Arthur Conklin, an expert on electrical grids in the College of Technology at the University of Houston.

The U.S. Department of Transportation lacks the authority to regulate airline customer service beyond a narrow set of issues, according to passenger advocates. . .

Continue reading.

I think at this point we can say deregulating airlines has not worked. It’s time to again impose regulation on an industry to change its focus from being solely on profits to again consider the customer experience.

UPDATE: A very interesting column in this connection: David Brooks’s column The Great Affluence Fallacy. A society in which profit is the driving force and the root of power seems to have gone off the rails.

Written by LeisureGuy

8 August 2016 at 5:58 pm

3 Responses

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  1. There is an overall trend, individually withing each company and with powerful corporations as a whole, and their relations to government and the public in general to consider functions of the business solely in relationship to successful finance rather than business impact on the environment, on the life of employees, on the welfare of the economy as an integral component of quality of the life of the nation, and, as indicated, on the quality of the product. The current attitudes seem to be modeled out of the concept that the nation exists to benefit the dynamics of business rather than that the dynamics of business should be tailored to the benefit of the citizens of the nation resulting in major faults in the entire relationship.


    8 August 2016 at 9:25 pm

  2. Well said. 50 years ago many corporations acted on the assumption that they were obliged (morally or ethically) to consider the welfare of the “stakeholders”: the employees, the community, and the shareholders. It seemed to me then that many corporations took this quite seriously, particularly those whose with a definite tie to a particular community/region—e.g., because their manufacturing facility was there and was a vital part of the local economy. (This was true even for some large corporations: Kodak in Rochester NY, for example.)

    But starting some years later, the emphasis shifted to focus solely on shareholders, and the only goal became to increase shareholder value, with little concern for the employees (cf. Wal-Mart), the community (cf. Wal-Mart), and quite often, as in this story, the customers.


    8 August 2016 at 9:40 pm

  3. @jiisand: I just read David Brooks’s column “The Great Affluence Fallacy” which seems quite pertinent in this context. I’ll blog it later today, but wanted to point it out here.


    9 August 2016 at 5:12 am

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