firmly in place has been confirmed through an abundance of historical evidence.
Is force profit sharing moral?
It has been said that only Nixon could go to China—that is, he had such an anti-China reputation that his supporters would allow him to engage in action that would have gotten a China sympathizer denounced. Unfortunately, the way the allegedly pro-business administration of Lee Myung-bak has gone to China is by taking on bad policies that go against its previously sensible stances.
The current administration has adopted policies that would have been regarded as unacceptable under even the anti-market, anti-enterprise government of former president Roh Moo-hyun. Profit sharing is just the latest example. The idea is that large companies should share the "extra" profits with their subcontractors when they earn more than their yearly targets.
Chung Un-chan, former Seoul National University professor and former Prime Minister for President Lee Myung-bak, is leading the campaign as the head of the presidential Commission on Shared Growth for Large and Small Companies. [[KC: This paragraph needs something else. Should the commission be abolished? Is there something stupid he has said?]
Profit allocation will become a political deal
American management Peter Drucker guru once pointed out that a major problem in many businesses is that they are "doing well what ought not be done at all." The current administration has mastered the art of doing that which ought not be done. Most of the discussions over the profit-sharing scheme have been over the process—how to allocate extra profits. But it is a policy that ought not be done at all. The proponents argue that subcontractors are entitled to a part of the profit as they have contributed to the large companies` upbeat earnings. Then, how can we calculate the individual suppliers` contribution and allocate profits?
We see this song and dance when government intervenes into the economy—arbitrary political decisions that have nothing to do with economics. The process of measuring the contribution and allocating profits will be interrupted by arbitrary interpretation and judgment, which will cause enormous market distortions. In other words, they are trying to do well that which should not be done.
Does government expect large companies to stand still, like punching immobile punching bag dummies, without trying to duck these meddlesome regulations? Large companies are likely to respond by setting yearly targets high enough to minimize "extra" profits. The government will respond by trying to prevent that, introducing another layer of regulations. As former U.S. president Ronald Reagan has been credited with saying: "The more the plans fail, the more the planners plan."
Profit sharing will undermine the very foundation of our society
Regardless of its feasibility, we have to realize first that profit sharing will seriously undermine the very foundation of our society. One of the underlying principles is private property rights. That allows an individual to own property—to use, invest or dispose it at his own will, with limited outside intervention. Corporate earnings belong to shareholders. They decide how to allocate those profits. The idea of sharing extra profits with other companies is a grave threat to our society as it undermines private property rights.
The proposal also entails moral problems. It will lead to sharing only profits and isolating any losses. The proponents want to give sub-contractors the right to claim part of the large companies` extra profits, without having them share when there are losses. It has been said that "success is a failure, but failure is an orphan." In this case, the Korean government wants big companies to share profits with others, but leave the big companies to lick their wounds alone when they fail. If subcontractors are entitled to share the profits, they should be held accountable for any losses at the same time. The idea of taking only profits away from large companies is morally unacceptable.
Vested interest
Another problem is the protection of vested interests. The proposal will give huge benefits to those in supply partnerships with big business groups. That will present a stiff entry barrier to their competitors and newcomers. Is it morally correct to protect the vested interests of the large companies` subcontractors and exclude other small firms?
Nixon was right to go to China in 1972, but the Lee Myung-bak administration is wrong to use its business credibility to intervene at will in the market. It makes matters even worse with socialist, share-the-wealth schemes.
By Kwon Hyeok-chul, head of market economy research team at the Center for Free Enterprise
