Friday, July 19, 2019

Are the Boeing 737 Max Crashes a Case of Market Failure?

Boeing Max 737
Kevin emails:
Hi Bob,

Regarding the Boeing 737 Max crashes, if I have my facts correct, there were 2 crashes (one in October 2018 that killed 189 people in Indonesia and another in March 2019 that killed 157 people in Ethiopia) that killed 346 people in total before the plane was officially grounded.  According to the article below, "Boeing cut corners to save money".  

My question is, wouldn't "free market capitalism theory" (not sure what the correct terminology is) tell us that Boeing wouldn't want to risk its reputation (as it would affect the company's bottom line) and, therefore, would only produce products that it believed were safe to its customers?

Maybe it can be argued that Boeing (incorrectly) believed that their customers would be safe, despite the cost-cutting measures.  If that were the case, however, wouldn't they have grounded the planes after the first crash because having it happen a 2nd time would be a disastrous outcome?  Isn't this also the free market argument that regulatory oversight for plane safety is unnecessary?

In this case, however, there was both regulatory oversight (from the FAA) and free market forces (Boeing not wanting to lose the public's trust) but yet we still had 2 crashes.

What are your thoughts on this?

RW response:

First of all, I am not an expert by any means on plane engineering, so I have no idea whether the plane was improperly designed. I am really against people who are not experts pontificating on any technical science, be it climate change, plane engineering or whatever if they haven't spent serious time studying the subject.

So I will state I have no idea and no opinion if the plane was poorly designed or if the two crashes were simply coincidences.

It strikes me as extremely unlikely that Boeing senior management would have allowed the planes in the air in the first place if they knew two planes would crash in such a short period. This has no doubt been a nightmare for them. In fact, while stock market indexes are at new all-time highs, the market capitalization of Boeing is down by roughly $30 billion from its high.

That said, there is nothing in free market theory that says occasionally dumb management can not end up running a company. All free market theory says is that if a management is so incompetent that they end up ruining their product, they are not going to be in business much longer.

Let's, arguendo, say that management did understand that the 737 Max was designed with serious flaws and sold the planes knowing they would crash, now how long do you think they would be able to get away with that even if there were no government regulatory airline agencies?

I would say if there was one more 737 Max crash that would pretty much be the end of anyone willing to fly on a 737 Max.

Now, it is possible that management was dumb and was aware of a faulty design but thought "Oh, well it is no big deal." But once planes do start crashing, it will become a very big deal.

My guess is that after the first crash, top management thought of it as an outlier event. Whether they should have or not is a different question.

Regardless, the free market reacts viciously against obvious stupid.

Boeing’s origin dates to 1916, so management has a very long track record of not being stupid. That's why people have trusted flying in their planes without giving it a second thought.

But if management decides to cut corners in ways that will cause planes to crash, plane sales will also crash. The free market will see to that, pronto.



  1. "Boeing’s origin dates to 1916, so management has a very long track record of not being stupid. That's why people have trusted flying in their planes without giving it a second thought."

    I read blogs where Boeing employees work.

    Boeing in Seattle is indeed a 100 year old company.

    There are people who say they won't fly in any plane assembled in North Carolina.

    There are also people, sometimes the same people, who say Boeing is a different company since the move to Chicago, regardless of location. Some of them won't fly ANY 787, wherever it is assembled.

    They note specific ways in which the company differs, and it is never for the better.

    Thank you for declaiming any such knowledge or ability to respond. My comment can stand on its own.

    The fact that TWO plane crashes, clearly related from what little non-Fake News was released, was not enough to satisfy you beyond a reasonable doubt that they had a problem, is, while troubling, par for the course.

    "It strikes me as extremely unlikely that Boeing senior management would have allowed the planes in the air in the first place if they knew two planes would crash in such a short period."

    Bob, there are actual documented shortcomings, cultural and procedural, many of them, that occurred in the development of the MAX.

    If they KNEW the planes were going to crash, they would not have deemed the planes airworthy. D'uh. SHOULD they have known? Yes. They, for some definition of "they," should have known.

  2. Aircraft safety is a clear cut case of moral hazard created by government regulation. Being "certified" by FAA or such is considered to be both proof of safety and a good shield from liability. Now, as we know FAA basically neglected to actually check the safety of 737MAX. Rest assured that no FAA bureaucrat is going to suffer any consequences.

    The second part of it is the whole concept of corporate personhood - it is corporation who is liable if SHTF, not the employees. In a world without government-supported legal fiction of corporate personhood the managers, directors, and shareholders of Boeing would be personally liable - criminally in this case - for negligent manslaughter.

    1. Your first paragraph touches on an important point that those who see this as a failure of the free market fail to consider. There isn't really a free market unless there is also a free market in regulation. When you have a state agency like the FAA running the safety standards, it crowds out more accountable, private-sector regulators, and also creates the veneer of meaningful safety certification. Agencies like the FAA are subject to regulatory capture; indeed, I read that the FAA folks responsible for regulating Boeing are actually Boeing employees housed on Boeing premises (I can't verify if that is actually the case).

  3. The 737 Max's problem stem from a creative way to comply with government regulation at the lowest cost.

    The government makes completely new aircraft very expensive not only for the aircraft manufacturers but for the customers, the airlines. In order to comply with regulation at the lowest cost Boeing had to make a new plane that qualified as an existing plane and flew exactly like the existing plane.

    So they took the 737 and extensively modified it running into various dimensional problems, especially with the engines. The plane they created was still by government standards a 737 but it didn't fly like the old plane. The software controls made it fly like the old plane. Without the last part airlines would have had to spend a lot of money on training.

    Unlike engineering software people have not built up the ways of doing things to prevent failure. As a result we have the problem with the software only looking at one of the two sensors canceling out the redundancy put there by the mechanical engineers. Ordinarily that would be no issue, the pilots would turn off the software and fly the plane. I've read that the plane without the software does fly differently and less forgiving but it's not unstable. So a competent pilot can handle it. Anyway remember this software is required by the government regulators and as such turning it off and keeping it off is not easy or maybe impossible to do.

    So there it is. There's one fault that is a corporate failure but it only gets to rise from an annoyance to a serious level because of how the government regulates.

    1. What you're saying is that because the government had a loophole to reduce costs, Boeing had an obligation to take advantage of it, damn the consequences. However, there is no way that the MAX is the same plane, period. It isn't. It never was. Your statement that the software tweaks make it fly like the old 737 are false. Enough people inside Boeing knew this.

      Boeing was caught with its pants down. The A320 design dates from the 1980s. Ignoring everything else, it is a more modern design, and was simply more amenable to slapping newer bigger engines on it.

      You know what plane Boeing had, but canceled, in a similar class, that would not have suffered from the problems of the MAX? The 757.

      The 737 dates from the 1960s. It was limited in capability from the start, by design. Its 1990s-era upgrade should have been the end of the line. Boeing cut the 757 from its lineup, when it shouldn't have, and pushed the 737 when it shouldn't, in a vain attempt to keep up with Airbus.

      Your analysis of software design is also inaccurate. Avionics software is not new, nor is its development. But outsourcing it to firms with no background in it is, as has also been revealed since the crashes.

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