Thursday, January 29, 2009

Big Business = Big Government

John Medaille over at The Distributist Review hit another home run on Saturday, with a post titled "Buy it up, break it up, fund it right." He argues quite convincingly that all these corporate entities which get described as "too big to fail" are actually too big to succeed. Specifically, he writes "everybody has found out what the distributists always knew: they are too big to succeed without the help of big government." 

If these companies can't survive without government bailouts, as huge as they are, why do they thing getting bigger is going to help? Is the problem with CitiBank that it wasn't big enough? Is GM just too small? It blows my mind that people are seriously talking about a merger between GM and Chrysler. It seems clear to me the answer to our current economic woes isn't consolidation, but diversification.

Medaille writes: The same plan holds true for other enterprises that need bailouts, such as the Big Three automakers. The obvious problem with these companies is that they are too big and there are only three of them. Japan, a much smaller nation, supports nine auto companies... there is no reason we couldn't have nine automakers, or 19. Choices would go up, prices would go down, and local manufacturing would increase..

I would love to see our Big Three automakers divide up into the Appropriately Sized 19. Isn't that consistent with the basic principles of capitalism? Capitalism says economic diversity is good. Competition is good. Monopolies are bad.

It would be nice if the Big Three would do it on their own, selling off pieces that could/should be independent entities. Or, Uncle Sam could buy the whole shebang and then sell off the pieces. If things continue to go downhill, that possibility just might come to pass.

The point? Some people believe in big business and distrust big government. Others like big government and distrust big business. I hope both groups will come to see that Big is Big (and Big is Bad), and the line between big business and big government isn't nearly as solid as many seemed to think.


Pete said...

I'm a long-time reader, first-time commenter. :-)

Two comments to make on this post:

1) It is great that you developed this FIST "value set" with regards to DoD Acquisitions but yet find examples of, and are passionate about, its application in other domains and areas of life.

2) Someone who supports consolidation of large companies for the purpose of their survival would say it reduces costs and brings down prices because of the elimination of unnecessary duplication that exists when the two companies are separate. Meanwhile, you say prices will be brought down if the companies were independent because it would increase competition. In my view, you are both correct but there is a tipping point (arrgh, "tipping point" is becoming way too overused, forgive me) between when those two rules apply. In a market with lots of players where competition will remain high after a merger, consolidation can create efficiencies that otherwise would not have been met (bigger is not always "badder"). At some point the size of the companies reach a point where any benefit of consolidation is eliminated by both the decreased competition and the increased bureaucratic framework needed to keep such a large entity functioning. This leads to two definitions of size. The first is in market share, the second is in the shear number of people, offices, branches and such.

I've stopped in at the The Distributist Review once before but don't know too much about it. I would be interested to learn more about the economic impact of telling a company they can no longer expand once they hit 20% of market share (or whatever the size limit would be). The implementation of such a policy and its consequences is interesting.


The Dan Ward said...

Hey, great to hear from you, Pete! It is funny how many things my little FIST concept can apply to.

You're correct that mergers can bring some efficiencies of scale by removing redundancies... and as you pointed out, that only works to a point. The problem is that people seem to expect it to continue indefinitely, as if the most efficient thing in the world is a huge monopoly.

And yes, a market with lots of small competitors can create inefficiencies (which is one of the reasons Walmart is able to undercut so many small mom & pop shops). I think there is a healthy middle ground, which is neither dominated by a small number of entities nor overwhelmed by large numbers of inefficient and overpriced boutiques.

As for telling companies they can't expand, I have two thoughts. First, we already have laws forbidding monopolies, because they are bad for the market (both producers and consumers). I think the logic behind anti-monopoly laws (and anti-trust laws in general) applies to markets with small numbers of big companies (i.e. the Big Three automakers). So I don't think it's a big stretch.

Second, I think it makes good business sense for a company to self-regulate its size, without anyone forcing them to. For example, Applied Minds is a (deliberately) small design firm I've worked with. They create products, then spin off little start-up companies to produce and support the product. They maintain a relationship with these companies, but they don't let them a) distract the parent company from their core business or b) drag the parent company down if things don't work out. Richard Branson's Virgin Group does something similar.

Bigger isn't always badder, but capital-B-Big carries the seeds of its own destruction, and when they go down, they take a lot of people with them.