Saturday, September 19, 2015

The Fireproof Hotel approach to business

In a market economy, you will almost always win if you can fake it.

I have called this the Fireproof Hotel phenomenon, but it operates everywhere.

In mail-order Viagra, for example. If you don't actually put any Viagra in it, you get the money but the customer never complains. Sweet.

In fact, the whole dietary supplement business is based entirely on the Fireproof Hotel strategy:
Canadian researchers tested 44 bottles of popular supplements sold by 12 companies. They found that many were not what they claimed to be, and that pills labeled as popular herbs were often diluted — or replaced entirely — by cheap fillers like soybean, wheat and rice.
But, as I say, it operates everywhere. In the supply of replacement parts for aeroplanes. And in cars.

Here's how it works. The honest businessman (assuming you can find one) wants to market his hotel rooms as safer, so maybe he can charge more because the rooms are better, so he spends a lot of money to build a Fireproof Hotel.

His competitor just paints "Fireproof Hotel" on the side of a cheap firetrap, charges the same as the honest businessman and pockets the difference. Over time, the fake "Fireproof Hotel" is preferred by investors because it earns a higher rate of return (its management is "more efficient") and the real Fireproof Hotel has to pay an additional penalty (on top of its honest construction costs) to borrow capital, if indeed it can access capital at all.

Along the way, the occasional traveler will be burnt alive, but, hey, that's just part of the risk/reward system that guarantees that some entrepreneurs will succeed while others fail.

And that's what the story about Volkswagen's sensors that defeat emissions controls is all about.

The man responsible for the death-dealing software, Ferdinand Piech, was recently ousted, and it would be nice to say that it was retribution for cheating, but in fact it appears it was because Piech was not ruthless enough.

Capitalism can be cruel, even to capitalists. but the cruelty is relative. The drivers killed by GM's and Toyota's killer technologies are still dead but Piech is still a living multibillionaire -- about $9,000,000,000.

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