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In Praise of Government Bailouts: Cocktail Edition

December 19, 2009

Here is a neat little parable about market failures in the age of mega-conglomerates.

Behold Angostura bitters:

Angostura Bitters

Angostura Bitters (Thanks to Wikipedia for image)

Angostura bitters are one of the oldest and the most venerable of all bitters. Bitters are flavorful, aromatic, highly-concentrated alcoholic formulas, a few dashes of which make a flat cocktail a phenomenal cocktail. Angostura bitters are integral components of Manhattans and Old-Fashioneds, among many other concoctions. In short, a bar without Angostura bitters is not a bar worth visiting. Yet if the free market had had its way, every bar in the world would have been without Angostura bitters.

Since the 1830s, the bitters have been produced by the House of Angostura in Trinidad and Tobago, where only a handful of people know the recipe. In 1997 it was sold to CL Financial, a Caribbean conglomerate. As you might guess inasmuch as CL Financial has “Financial” in its title, 2009 was a bad year for the House of Angostura’s parent company. In fact, CL Financial was hit by a liquidity crisis, causing the Angostura factory to shut down. Bars and liquor stores quickly bought up the last batches, preparing for the perhaps-permanent drought ahead.

Things were not looking good for cocktail devotees, nor for those who had been hoping to relive all of their favorite Mad Men moments. (Earlier this year, the Amazon page for Angostura noted that, “Customers who bought Angostura bitters also purchased Mad Men Season 1,” a sure sign that Don Draper’s love for Old-Fashioneds has been a godsend to cocktail ingredient manufacturers.)

But as the unobservant like to say, it’s always darkest just before dawn. In stepped the government of Trinidad and Tobago with a government bailout. I guess the House of Angostura was Too Big (relative to the size of the T&T economy) To Fail. The factory is back in action, and before long Angostura’s iconic oversized label will again be gracing the shelves of liquor stores across America (and state stores across Pennsylvania).

So here is the lesson about the free market: the market viability of CL Financial tells us nothing about the market viability of its component parts. The House of Angostura has never ceased to be a successful and profitable company. But if CL Financial had gone under, or if the T&T government hadn’t intervened, the House of Angostura factory could have shut down for good. Even if the five people who knew the Angostura recipe wrote it down or offered to sell it to another company, chances are the bitters could never be reproduced exactly. Too much of the relevant knowledge is embedded in the organizational routines of that particular factory, with those particular employees. All of this knowledge would have been lost as Angostura employees left for other jobs; the world would have forever been deprived of the most important bitters.

Untrammeled market forces almost destroyed a source of great, great utility. Fortunately, state actors stopped this act of creative destruction. The point being: your next Old-Fashioned won’t quite be brought to you by socialism, but it certainly won’t be brought to you by laissez-faire capitalism either.


From → Capitalism, Cocktails

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