Thursday, May 21, 2015

Three Gross Generalizations in One Column: Thomas J. Friedman

Three Gross Generalizations in One Column:  Thomas J. Friedman

I only have to produce two columns per month for the News & Observer, and at times it is hard to come up with material.  So I don’t envy Thomas Friedman’s task of putting together a column once a week.  However, in yesterday’s New York Times Mr. Friedman may have set a record by cramming three thinly supported generalizations into a single column.[1]  He begins by asserting that this presidential election cycle features the lowest level of policy discourse in history.  He then makes a broad economic assertion that “we are at the beginning of major shift on the question of what is worth owning.”  And he polishes of the column by asserting that the geopolitical world can be divided into the “World of Order versus the World of Disorder.”   I’ll leave it to political analysts and political scientists to pick at the first and third assertions in Mr. Friedman’s column.

I want to briefly examine Mr. Friedman’s economic notion that we are entering an economic period in which the salient question is what assets businesses should own.  He uses a catchy quote from Tom Goodwin at Havas Media to build his case:

Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.

To be sure, it’s a great quote.   However, the question of what assets business should own is as old as capitalism itself.  For decades companies have been trying to figure out how to generate the highest possible return on investor capital, while retaining effective control of their businesses.  Undoubtedly, the Internet and microprocessors have allowed Uber, Aliba, and Airbnb to achieve a high level of control of wide-ranging assets without having to own the assets.  Mr. Friedman has simply walked into a story that’s been unfolding for a long time. 

For example, in the hotel industry a major company like Hilton hasn’t had to own much more than its brand and trademarks.  One set of investors own the land and buildings, and another set of investors own the property and hotel management companies.   A hotel company might even be able to outsource the reservation system.  In the end, the hotel company controls a vast empire of properties through a series of contracts and licensing agreements. 

For decades McDonald’s and most major restaurant companies have controlled a majority of their U.S. restaurants without owning them.  Manufacturers have been shedding inventory through “just-in-time” systems for years.  I vaguely recall Mr. Friedman writing about these systems 25 years ago.  Most airlines don’t own their planes and often don’t own their commuter operations.   I could go on and on.

The world is extremely complicated, so we eagerly welcome anyone who can simplify and make sense of the chaos that surrounds us. However, Mr. Friedman is not doing us any favors when he makes claims that don’t stand up to scrutiny.  Moreover, I’m not expecting the presidential aspirants to answer Mr. Friedman’s or anyone else’s policy questions.  Those folks are too busy raising money from the people who will actually control America’s public policy.

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