Back to the failure: an analytic narrative of the De Lorean debacle

Abstract

There has been a recent identification of a need for a New Business History. This discussion connects with the analytic narrative approach. By following this approach, the study of business history provides important implications for the conduct and institutional design of contemporary industrial policy. The approach also allows us to solve historical puzzles. The failure of the De Lorean Motor Company Limited (DMCL) is one specific puzzle. Journalistic accounts that focus on John De Lorean's alleged personality defects as an explanation for this failure miss the crucial institutional component. Moreover, distortions in the rewards associated with industrial policy, and the fact that the objectives of the institutions implementing the policy were not solely efficiency-based, led to increased opportunities for rent-seeking. Political economy solves the specific puzzle; by considering institutional dimensions, we can also solve the more general puzzle of why activist industrial policy was relatively unsuccessful in Northern Ireland.

Keywords::

• institutions
• analytic narrative
• Northern Ireland
• industrial policy
• entrepreneurship

Acknowlegements

This paper benefitted from the comments of an anonymous referee and participants at a variety of conferences and seminars including various events held at the Queen's University Centre for Economic History. Useful comments were also received after the paper was presented at the Economic History Society conference 2013 held at the University of York and the economic history workshop held at the Central Bank of Ireland in Dublin in 2014. I would particularly like to thank Chris Colvin, Alan de Bromhead, Cormac Ó Gráda, Mitchell Larson and John Turner for detailed comments on various versions of the manuscript.

Notes

^1.Hume, “Of the Independency of Parliament,” 40–42.

^2. Quote attributed to De Lorean as an undergraduate. See Levin, John DeLorean, 26.

^3. David Healy, Wall Street automobile analyst, cited in clipping from The Irish Times January 20, 1979 taken from Public Record Office for Northern Ireland (henceforth PRONI) DMS/2/129 “IR Intelligence De Lorean Motor Cars,” PRONI, Belfast.

^4.de Jong, Higgins, and van DrielNew Business History?

^5.Lamoreaux, Raff, and Temin, “Economic Theory and Business History”; Morck and Yeung, “Economics, History and Causation”; de Jong et al. New Business History?, Jones, van Leeuwen, and Broadberry., “The Future of Economic, Business and Social History.”

^6. de Jong et al. New Business History?

^7. On the need for renewal see Jones et al., “The Future of Economic, Business and Social History.”

^8.Crafts, Economic History Matters; Eichengreen, “Economic History and Economic Policy.”

^9.Gras, “Are You Writing a Business History?” 73.

^10.Fridenson, “Business Failure.”

^11. Ibid; Lamoreaux et al. “Economic Theory and Business History,” 38.

^12.Buchanan, What Should Economists Do? 184.

^13. Ibid., 178.

^14.Mueller, “Constitutional Public Choice,” 124.

^15. The rent-seeking concept stems from the analysis laid out originally by Gordon Tullock (“The Welfare Costs of Tariffs”). However, the term was first used by Krueger (“The Political Economy”). The term applies to a situation when an agent seeks to ‘obtain an artificial transfer, usually from government, and covers all the actions, efforts or expenses that the agent has to carry out to obtain the prize. The key issue, however, is the possible social waste that arises in these situations’, Del Rosal, “The Empirical Measurement,” 299. It represents social waste because it reallocates resources towards unproductive rather than productive activities.

^16.Buchanan, “Rent Seeking and Profit Seeking.”

^17.Fielding, “Investment, Employment and Political Conflict.”

^18. Fallon and Srodes provide a figure of $14 million. Fallon and Srodes, DeLorean, 397; Levin puts the figure at $16 million, John DeLorean, 6.

^19. We follow the practice of the official NIAO report and use John De Lorean's own preferred presentation of his surname name rather than the more conventional ‘DeLorean’ used in the journalistic literature.

^20.Northern Ireland Audit Office, Department of Enterprise.

^21. “De Lorean Motor Company” in an undated document entitled “De Lorean Motor Company, Background Note Capital Structure,” PRONI DED/21/6/1, undated, PRONI, Belfast.

^22. Ibid. Clipping made from article in Marketing Week entitled “De Lorean: Bumpy Ride Ahead,” dated July 28 1978, PRONI DED/21/6/1, PRONI, Belfast.

^23. Crafts, Economic History Matters.

^24.Rodrik, In Search of Prosperity.

^25.Coase, “The New Institutional Economics.” A textbook definition identifies it as a school of thought ‘that builds on the work of Coase, North and Williamson. In general, the approach takes an efficiency perspective and focuses on individual actors, who are characterised by bounded rationality and (possibly) opportunistic behaviour’ (Groenewegan, Spithoven, and Van Den Berg, Institutional Economics, 374).

^26.Boettke, “Review.”

^27.Bates, Grief, Levi, Rosenthal, and Weingast, Analytic Narratives, 11.

^28.Bates, Greif, Levi, Rosenthal, and Weingast, “The Analytical Narratives Project,” 698.

^29.Dessler, “Analytic Narrative.”

^30.Bates, Greif, Levi, Rosenthal, and Weingast “Analytical Narratives Revisited,” 691.

^31.Alexandrova, “When Analytic Narratives Explain,” 2.

^32.Levi, “An Analytic Narrative Approach.”

^33.North and Weingast, “The Evolution of Institutions”; Greif, “Cultural Beliefs.”

^34. Drelichman builds on Rodrik's second-best approach to institutions, which states that apparently inefficient institutions might actually improve economic efficiency if other distortions are present, to consider the Spanish Mesta. Drelichman argues theoretically and produces convincing empirical evidence that the Mesta represented a second-best institutional arrangement. Koyama revisits the medieval prohibition on usury. The paper suggests that prohibition was a by-product of regulatory capture. Koyama develops a formal model and historical discussion that links higher interest rates to groups – including rulers, merchant-bankers and the Church – that could capture rents. Moreover, Koyama suggests that usury prohibition was a self-enforcing institution. Rubin considers bills of exchange and the existence of different equlibria concerned with impersonal exchange emerging under different conditions. In one case, which pervaded the Middle East, lending remained based around social-personal networks. In the other ‘Western European’ equilibrium, such personal financial networks were replaced by impersonal markets. Rubin speculates that Middle Eastern relative underdevelopment was in part the consequence of the continued reliance on personal–familial relations in the market for long-distance finance. See Drelichman, “Licence to Till”; Koyama, “Evading the ‘Taint of Usury’,” and Rubin, “Bills of Exchange.” For general points along these lines see Rodrik, “Second-best Institutions.”

^35.Ingram, Rao, and Silverman, “History in Strategy Research.”

^36.Baumol, “Entrepreneurship: Productive, Unproductive and Destructive.”

^37. Ibid., 898.

^38.Baumol, “On Entrepreneurship,” 11.

^39. Baumol, “Entrepreneurship,” 894.

^40.Murphy, Shleifer, and Vishny, “The Allocation of Talent.”

^41.Acemoglu, “Reward Structure.”

^42. Ibid., 33.

^43.Nunn, “Historical Legacies.”

^44. Ibid. Nunn's model, and his accompanying historical discussion, demonstrates that those colonies with a low disease environment became settled and property rights were protected. In such colonies, the high production equilibrium emerged. In contrast, Nunn finds that the low production equilibrium emerges with high disease incidence. Crucially, he shows that the stability of the low production equilibrium persists even after external extraction ends.

^45.Henrekson and Sanandaji, “The Interaction.”

^46. Ibid.

^47. Ibid., 53.

^48. Ibid., 58. Frivolous lawsuits are defined within economics as those with a low chance of prevailing at trial. They are only brought for the prospect of settlement. For a theoretical discussion on the economics of frivolous lawsuits and their connection to entry barriers see Katz, “The Effect of Frivolous Lawsuits.”

^49.Aghion, Dewartripont, Du, Harrison, and Legros, Industrial Policy and Competition; Crafts, Creating Competitive Advantage.

^50. Aghion et al., Industrial Policy and Competition.

^51.Crafts, “British Relative Economic Decline,” 27.

^52. Ibid., 17.

^53. Ibid.

^54. Ibid., 26.

^55. Crafts, Creating Competitive Advantage, 3.

^56.Crafts, “The Golden Age.”

^57. Ibid., 21–25.

^58. Ibid., 24.

^59.Brownlow, “The Causes and Consequences.”

^60. Ibid.

^61.The Portland Trust, Economics in Peacemaking.

^62.Isles and Cuthbert, An Economic Survey, 186.

^63. Brownlow, “The Causes and Consequences,” 75.

^64. Isles and Cuthbert, An Economic Survey, 364.

^65. Ibid., 349.

^66. Ibid., 349.

^67. Ibid., 350.

^68.Birnie and Hitchens, Northern Ireland Economy, 82.

^69. For empirical surveys that give some counterfactual perspectives see the discussion in Ibid., 81–95 and Fielding, “Investment, Employment and Political Conflict.”

^70. Levin, John De Lorean, 174.

^71. The index of industrial production, as late as June 1971, stood at a record level. In the first six months of 1971 5,488 new jobs had been negotiated, but only 80 were in August and only 151 in September (Cairncross, Review of Economic and Social Development, 8).

^72. Ibid., 9.

^73.Quigley, Economic and Social Strategy, 25.

^74. Ibid., 36.

^75. Levin, John De Lorean, 260; Fallon and Srodes, De Lorean, 435–437.

^76. Levin, John De Lorean, 260.

^77. Fallon and Srodes, De Lorean, 268–282.

^78. Ibid., 435.

^79. Levin, John De Lorean, 129.

^80. Fallon and Srodes, De Lorean, 304.

^81. The GPD services episode could form the basis of a paper in its own right. At its simplest, R&D work for the car was supposed to be performed by Lotus Cars Limited, under an agreement with GPD Services Incorporated (GPD) a Swiss-based company. Agreement was for GPD to get US $17.65 million (or £8.83 million); however, DMCL paid Lotus/GPD an additional $23 million (£11.5 million) on a ‘cost plus’ basis for additional work. Investigation showed that none of the initial sums (US$17.65 million) ever found its way to Lotus. This fraud as well as the more general losses of public funds led to two decades worth of litigation. The arrest for cocaine possession (which was ultimately thrown out) has likewise been extensively covered elsewhere. For more details see Levin, John De Lorean; Fallon and Srodes, De Lorean.

^82. At General Motors (GM), he was clearly not interested in conventional business administration, but he had an undoubted ability in marketing. De Lorean did abide by institutional structures at GM but his behaviour there also demonstrated he could alter and evade. At Chevrolet, without the appropriate permission, he gave away dozens of cars to various girlfriends, golf pros and business associates. He was also prone to spend an increasing proportion of his time overseeing his private investments while on trips for Pontiac. De Lorean was dismissed from GM after he leaked a highly confidential draft planning paper to Automotive News. For more details on his of his separation package, including his ‘retirement dinner’, see Fallon and Srodes, De Lorean, 56–59 and 66–68.

^83. Ibid., 111.

^84. Ibid.,112.

^85. Ibid.,113.

^86. Levin, John De Lorean, 121–122.

^87. Ibid., 56–57.

^88. Ibid., 232.

^89. The Bricklin SV-1 was a car like the DMC-12 designed for the American market with a similar gull-winged design, and again like DMCL it left the taxpayer (in this case Canadian) worse off.

^90. Levin, John De Lorean, 154.

^91. Fallon and Srodes, De Lorean, 122.

^92. Ibid., 123–124.

^93. “De Lorean 1978–1980.” Minutes from Department of Commerce sent to ‘The Secretary’ De Lorean Motor Cars Ltd, April 12, 1979, PRONI CENT/ 1/10/18, PRONI, Belfast.

^94. Levin, John De Lorean, 159.

^95. Fallon and Srodes, De Lorean, 128.

^96. “De Lorean 1978–1980,” Minutes by George Quigley entitled “De Lorean Project,” PRONI CENT/ 1/10/18, July 14, 1978, PRONI, Belfast.

^97. Ibid. Minutes from Department of Commerce sent to ‘The Secretary’ De Lorean Motor Cars Ltd', April 12 1979, PRONI, Belfast.

^98. Ibid. Minutes by George Quigley entitled “De Lorean Project,” 4. July 17, 1978, PRONI, Belfast.

^99. Ibid. Minutes by George Quigley entitled “De Lorean Project,” July 14, 1978, PRONI, Belfast.

^100. Ibid. Telex to Frank McCann, Department of Commerce July 21, 1978, PRONI, Belfast.

^101. Ibid. “Minutes to Dr George Quigley,” July 22, 1978, PRONI, Belfast.

^102. Ibid. Unsigned document entitled ‘“De Lorean Project,” May 24, 1979, PRONI, Belfast.

^103. Ibid.

^104. Ibid. Minutes by George Quigley entitled “De Lorean Project,” 4. July 17 1978, PRONI, Belfast.

^105. Ibid. Such an assessment was predictable given the commitment made in the Quigley report to picking winners. Quigley praised De Lorean's entrepreneurship and charisma. De Lorean was described in the memo as a ‘cult figure … a man of star quality, respected for sheer, solid performance as well as for flair’ surrounded by a strong team. A successful project would in Quigley's opinion improve the region's reputation, help it break away from a ‘branch plant syndrome’ and provide a ‘catalytic effect’ for West Belfast's political and economic fortunes.

^106. Ibid., 4–5.

^107.De Lorean, DeLorean; Mason, Paying the Price, 219.

^108. “De Lorean 1978–1980,” Letter from John Freeman to Roy Mason, July 19, 1978, PRONI CENT/ 1/10/18, PRONI, Belfast.

^109. Ibid. Letter from Roy Mason to Joel Barnett, July 11, 1978, PRONI, Belfast.

^110. Joel Barnett was Labour's Chief Secretary to the Treasury (1974–79). He is most famous for lending his name to the Barnett formula, the formula that allocates public spending between the four constituent parts (England, Northern Ireland, Scotland and Wales) of the United Kingdom. Strathearn Audio Ltd was a State-owned and operated firm that produced speakers and turntables. It was not a commercial success.

^111. “De Lorean Motor Co. Northern Ireland Car Assembly Project.” Memo entitled “Northern Ireland: Claim on Contingency Reserve,” July 30, 1980, National Archive (henceforth NA) FV/22/125, National Archive, London.

^112. PRONI CENT/ 1/10/18. File entitled “De Lorean 1978–1980.” Memo entitled “De Lorean-additional funding,” June 27, 1980 held at PRONI, Belfast.

^113. Ibid. The official advice was that even if the UK government won the court case, the negative publicity of closure would have been huge on the heels of the failure of Strathearn Audio. Moreover, it was feared that the closure of DMCL would make the restoration of devolution even more difficult.

^114. Fallon and Srodes, De Lorean, 223.This episode became known as ‘the GPD fraud’ and was an important part of a series of lawsuits that attempted to recover public funds long after receivership. For more information see Northern Ireland Audit Office, De Lorean.

^115. Lotus was not used to designing for any kind of volume and this contrast with the mass production philosophy of the older engineers at Dunmurry led to conflict. Problems also arose from De Lorean's insistence that the car be built from the outside in (i.e. building the car from the stainless steel body shell to the plastic underbody inside and only then creating a chassis) was incomprehensible to the highly experienced Lotus engineers, steeped in conventional motor industry practice (Fallon and Srodes, De Lorean, 193–210).

^116. There are many of examples of this perhaps the most infamous example of extravagant expenditure was the remodeling of a guesthouse on the factory premises. A reputed £20,000 was spent on gold-plated taps for the bathroom. Levin, John De Lorean, 177.

^117. “De Lorean 1978–1980.” Document entitled “Heads of Agreement Between the Northern Ireland Department of Commerce, the Northern Ireland Development Agency and the De Lorean Motor Company,” PRONI CENT/ 1/10/18, PRONI, Belfast. This agreement was important because failure of DMCL to match its ‘employment obligations’ was supposed to entitle the Department of Commerce to some or all the funds given to DMCL.

^118. Only 123 cars were sold during the first 10 days of the month in the US and production in November ran at approximately twice the level of retail sales. De Lorean could claim correctly that 6500 cars worth £85 million were shipped from Belfast; only 1655 of these ever reached dealers. Fallon and Srodes, De Lorean, 371–378.

^119. Ibid., 376.

^120. “De Lorean Motor Company.” Document entitled “US Investment in Northern Ireland: Draft Guidance for Posts,” PRONI DED 21/6/1, undated, PRONI, Belfast.

^121. “De Lorean 1978–1980.” Minutes of meeting entitled ‘”The Secretary of States Meeting with Mr John De Lorean and Mr Cafiero – 9.15am on 5 August 1980 at Hillsborough Castle,” August 6, 1980, PRONI CENT/ 1/10/18. PRONI, Belfast.

^122. Ibid. Memo entitled ‘”De Lorean,” October 2,1980. De Lorean hoped an estimated shortfall of £6.3 million would come from the NIDA, but the UK government followed the Treasury's firm line that any shortfall required private sector involvement. McKinsey advice was that the funding gap between the £14 million loan and the actual sum needed was likely to be in the range of between £2 million and £14 million with a ‘most likely’ level of £9 million. Private correspondence between Humphrey Atkins and Keith Joseph in July 1980 was still more concerned with the negative publicity of closure for future investment rather than the viability of the firm. “De Lorean Motor Co. Northern Ireland Car Assembly Project,” Letter from Humphrey Atkins to Keith Joseph, July 25, 1980, NA FV 22/125, NA, London.

^123. Ibid. “De Lorean 1978–1980.” Minutes of meeting entitled ‘”The Secretary of States Meeting with Mr John De Lorean and Mr Cafiero – 9.15am on 5 August 1980 at Hillsborough Castle,” August 6, 1980, PRONI, Belfast.

^124. Ibid. Memo entitled “De Lorean,” October 2, 1980.

^125. Ibid.

^126. The Transbus was a project that De Lorean tried to develop initially with the public funding provided for the DMC-12, but this was clearly in violation of the subsidy agreement. NIDA forbade DMCL investing time and effort in any project not related to the car. Despite attempting to get American public funding support for constructing the bus in a deprived part of Miami, the Transbus project never came to fruition. One account suggests the possibility that it was ‘some sort of scam to lure car investors’. It is alleged that potential investors in the Transbus project would be asked at meetings to fund the Northern Irish car factory. Levin, John De Lorean, 190.

^127. Fallon and Srodes, De Lorean, 385.

^128. Northern Ireland Audit Office, De Lorean, 7.

^129. Ibid.

^130. Fallon and Srodes, De Lorean, 376.

^131. Ibid., 367.

^132.Boettke, Coyne and Leeson, “Institutional Stickiness and the New Development Economics.”

^133. Rodrik, “Second-best Institutions.”

^134. For more detail on the differences between best first-best and second-best approaches see Rodrik's discussion in ”Second-best Institutions.”

^135. Boettke, Coyne and Leeson, “Institutional Stickiness and the New Development Economics.”

^136. Ibid.

^137.Robinson, “Industrial Policy and Development.”

^138. Such authors argue that interventions shifted its exports away from comparative advantage and towards a model that stimulated productivity growth. Wade, Governing the Market.

^139. For alternatives to Wade and the developmental state line of argument see Rodrik, “Understanding Policy Reform”; Rodrik, Grossman, and Norman, “Getting Interventions Right”; Crafts, “East Asian Growth.”

^140. Crafts, “East Asian Growth.”

^141.Moretti, The New Geography.

^142. Fridenson, “Business Failure,” 582.

^143. Henrekson and Sanandaji, “The Interaction,” 62.

^144. Fridenson, “Business Failure.”

^145. Crafts, Economic History Matters.

Additional information

Notes on contributors

Graham Brownlow

Dr Graham Brownlow is a Lecturer in Economics in the Queen's University Management School (QUMS) and Research Associate of Queen's University Centre for Economic History. He is co-editor of Irish Economic and Social History. His has written a range of papers in areas including: economic and business history, applied institutional economics, regional economics, entrepreneurial economics, the economics of counterterrorism and the methodology of economics and economic history.