When an iconic company renowned for technical brilliance, industrial genius and manufacturing strength falls from the pedestal, it raises fundamental questions. The revelation that the world’s largest automaker, Volkswagen (VW), installed a “defeat device” in 11 million vehicles to cheat on diesel emissions tests offers a singular learning moment about cutthroat corporate culture, the downside of markets, and the value of regulation.
The software which equipped VW cars to understate nitrogen oxide emissions in laboratory environments, while discharging 40 times more pollution than permitted levels in road driving conditions, exposes the dark underbelly of legends and reminds us of the terrible costs of success-by-any-means strategies.
Why did VW deliberately deceive its legions of customers and game the environmental impact measurements, making a mockery of its advertising slogan, “Truth in engineering”? The answer lies in its relentless ambition to become number one in the auto industry by hook or crook.
In July this year, VW achieved its dream goal of overtaking Toyota and selling more cars than any other company on the planet. Part of the reason why VW edged out its Japanese rival and left every other peer behind is the fraud around the amount of pollution its diesel models were emitting.
In diesel automobiles, there is a trade-off between mileage and emissions. A diesel car that runs longer on lesser fuel exudes more nitrogen oxides from its hind and thus violates stricter pollution standards in markets like the United States. Since overcoming the inverse relationship between performance and pollution was proving impossible, VW’s engineers decided to beat the competition through foul methods. They manipulated the emissions testing mechanism and helped VW’s managers and salespersons seduce buyers with so-called “clean diesel” technology. VW won the gold medal by doping.
A fascinating new book by Nobel laureate economists, George Akerlof and Robert Shiller, Phishing for Phools, explains why dodgy behaviour is an inevitable feature of markets. They argue that “as long as there is profit to be made, sellers will systematically exploit our psychological weaknesses and our ignorance through manipulation and deception. Rather than being essentially benign and always creating the greater good, markets are inherently filled with tricks and traps.”
The bad news for worshippers of free market capitalism, they say, is that corporations locked in battle with competitors are hungry for “opportunities for unusual profits” which are hard to find, and hence they resort to unfair tactics to dupe the public and get ahead of the rest in the field.
Shiller attributes this tendency, which is not confined only to VW or the automobile sector, to the concept of “tight profit margins” and the logic of “survival of the fittest”. In other words, nice girls and guys who play by the rules finish last and it is anathema in the capitalist order to be a loser.
The VW scandal is not just a saga of familiar corporate greed and shenanigans. VW acted as a weasel without fear of scrutiny for years due to the fact that it was operating in an economic system rigged in favour of the most powerful corporations.
After VW’s reputation came crashing down, it has come to wider notice that this megalith benefited vastly from the German government’s patronage and lobbying to ensure that it kept rising to the top without hindrance. Just as Wall Street and US governmental offices have a revolving door relationship, VW and other big German auto industry giants have cosy ties with the elite echelons of German politics.
The protective layer extended to VW and German auto majors like BMW and Daimler as “national champion” companies by successive German governments helped them brush under the carpet numerous illegalities and infringements.
Despite its glowing international image as a “green superpower” whose industries have set benchmarks in energy efficiency and adoption of renewables, Germany went all out to stymie and delay European Union standards on cutting emissions.
According to the New York Times, Chancellor Angela Merkel wielded an array of inducements and threats to force the EU and its member states to go light on legislation that would be stricter on vehicular pollution. In the words of a German Green Party politician, it was “a shameful sop to German car manufacturers.”
Ms Merkel would defend herself from the point of view of how many workers’ jobs in the German auto industry she is conserving and how it is her responsibility to maintain Germany’s competitive economic lead. But since VW’s secret was uncovered by independent researchers at West Virginia University in the US, there has been an opportunistic public distancing by German leaders from their prized car companies.
German finance minister Wolfgang Schäuble has expressed “amazement” at VW’s “greed for fame, for recognition.” He and the German people would do better by critically examining how regulatory failure and cultural indoctrination to glorify automakers generated this amazing fraud.
The global economic crisis since 2008 has demonstrated from Wall Street and the City of London to Detroit, and now Wolfsburg (VW’s headquarters in Lower Saxony), that corporate titans lie and misguide to different degrees to maximise profit, fill their pockets and revel in the satisfaction of being the dominant players. They have been permitted to go about in such seedy fashion by connivance with government regulators that ends up causing misery for ordinary people and irreparable harm to the environment.
It is not enough to respond to VW-style chicanery by recalling cars for removing the swindling software, fining the errant company, or prosecuting some of its employees. These are necessary remedies but not solutions.
To recall Akerlof and Shiller, the ultimate checks on the excesses of unscrupulous capitalism are “careful oversight” over “hard to tame” corporations, as well as a correction of the “wrong story” of unambiguous benefits of economic liberty. Free markets can “harm as well as help us”, and which way they actually go is up to conscious citizens who must understand the real nature of the beast.
The writer is a
professor and dean at the Jindal School of International Affairs
