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Friday, May 15, 2009

Too Big to Fail

"Power tends to corrupt, and absolute power corrupts absolutely. " Lord Acton

Being too big to fail, if true, couples a concentration of power (bigness) with a corruption of the free market ideal. The same concentration of power seems to inherently lead to other corruption as well. Mancur Olson's research and thought regarding the nature of special interests groups makes it seem inevitable to me that mega-corporations, especially in slow changing industries, will (continue to) form symbiotic relationships with the State that further strengthens both the mega-corporation and the State, to the detriment of the rest of the citizenry. We're seeing exactly that with GM, Chrysler, Steel protectionism, banks, etc., etc., etc.

So, given this seemingly inevitable sequence away from an ideal free market economy and towards Corporatism, exacerbated by the existence of huge business, is there anything that can be done to slow it down?

I think that reducing the number and size of large corporations would be helpful. However, giving the Federal government the directive to do such a thing by fiat would be a cure far worse than the disease. The method of reducing the number of large corporations, in order to avoid even more corruption and waste, would have to be formulaic and not subject to the whims of the President, Congress or regulatory agency bureaucrats.

The devil's in the details, but I'm imagining there might be a way to tax bigness such that the shareholders of large corporations would split the corporations into smaller entities, unless the bigness really was so advantageous, because of some manufacturing efficiencies or something like that, as to outweigh the increased tax burden.

What do you think?


erp said...

When a company (or anything else) becomes too big and unwieldly, it will collapse all on its own making way for new streamlined entities to compete.

I remember when IBM was so big, it was thought risible that they could be overtaken. Enter Bill Gates stage right.

The major thing is for government to neither aid nor impede nature taking its course as it is doing right now. First it caused the economic collapse and now it seeks to "fix" it.

Hey Skipper said...

How did that steel protectionism work out, anyway?

Bret said...

Yes, every company will eventually collapse, if for no other reason than they forget to bribe the correct politicians.

IBM may not be the example you sought. The company grew to its monstrous size during the depression when it somehow got the contracts to supply the government with accounting machines for social security and then turned over its facilities to the government during WWII, which in turn further grew the company and made it inextricably intertwined with the government for decades.

Bret said...

Hey Skipper,

The point is that there was steel protectionism and the steel companies still exist.

blog editor said...
This comment has been removed by the author.
erp said...

I mention IBM because its size and prestige deemed it to be invulnerable to competition not because of its connection to government.

The U.S. steel industry may still exist, but it was also decimated by the unions and is only a shadow of its former self.

How do you all feel about the intellectual property argument over at Cafe Hayek?

I'm not sure I'm following the arguments against all patents and copyright laws. Apparently there are some who think patent rights impede progress, yet without them, inventors have no protection from investors developing their creations and leaving them in the dust.

Perhaps it's the age old question of how much regulation is enough and how much is too much.

Bret said...

The union thing is also exactly part of the problem. A big company or companies, especially in an industry dominated by big companies, are ripe targets for unions.

Big companies plus unions then are even more likely to seek and get government protection.

Industries with smaller companies are much less likely to unionize.

Bret said...

Re: Intellectual Property over at Cafe Hayek.

You probably saw my comments over there. Basically, even though I've got patents and have produced music, I think that IP laws are very counterproductive for society.

erp wrote: "...without them [patents], inventors have no protection from investors developing their creations and leaving them in the dust. "

I've been planning on doing a post on IP because I have now quite a bit of experience with it. In the robot world, what I've found is that benefit of each bit of patent "protection" is overwhelmed by the cost of having to deal with other patents, none of which aren't readily obvious to me. It's true that some of my investors were excited by our patent portfolio, but others actually declined to invest because they felt that the whole IP thing in robotics was too unpredictable (basically, we could just about have the product to market and then someone might end up with some patent that would sink the entire investment). And, interestingly enough, the investors that liked the patents were corporations with large legal staffs - what does that tell you?

Harry Eagar said...

Most of the steel companies do not still exist. It was not unions that did them in but incompetent management, which, for example, refused to adopt oxygen smelting technology developed in (get ready for it!) socialist Austria.

Gee, how could that have happened? Innovation in a socialist state? Shhh. Don't tell the libertarians.

The coup de grace was environmental regulations, which made dirty foreign steel cheaper, bumping off the last US producers. (Some were replaced by what are called minimills, which were profitable for a while. They, however, declined to bid for US business; and some of them [Nucor] have been in trouble, too.)

Now, you cannot get quality gray iron castings at any price, only Chinese crap.

Enjoy the market!

Susan's Husband said...

"The coup de grace was environmental regulations, which made dirty foreign steel cheaper, bumping off the last US producers."

Yes, that's precisely the kind of thing an unregulated free market suffers from.

P.S. Mr. Eagar, your projected absolutism is showing again.

erp said...

Bret, I understand the argument, but my "can't teach an old dog new tricks" mentally still doesn't feel comfortable putting out a brilliant idea and having someone else beat me to the market. I didn't see your comment at Cafe Hayek (there's no comments feed), but I'll go back and look for it.

Harry, do you think heavy handed unions produce bad management or bad management produces heavy handed unions?

As for intrusive regulations, it's now abundantly clear thanks to Obama that most of these are to protect the unions, not the public.

Susan's Husband said...


As someone else who has built a company from an idea, let me say there are a *lot* of steps between those two and just seeing my idea is not sufficient for someone to beat me to market.

In fact, it's so hard that in the field Bret and I work in, companies are frequently purchased to get the *people* who made the idea work, more than the idea itself.

Patent law may well have been of net benefit in the Industrial Age, but the Information Age? Very debatable.

Susan's Husband said...

Let me add that when I worked for Big Tech Company, they were hot for patents, despite the fact that they had very little interest in pursuing patent claims, and would do so only in the most flagrant and blatant cases. So why did they want patents?

It was basically a MAD situation. They wanted patents so they could pursue *counter-claims* against other companies who made patent claims against Big Tech Company. Had there been no patents at all, the overall business would have been unaffected. But since patents existed, BTC decided (quite rationally) that they needed them as a deterrent from patent based attacks. The patents certainly added nothing to encouraging invention.

Harry Eagar said...

erp, with steel, it was bad management from the git-go, before there were any unions.

I cannot recommend too highly Kenneth Warren's 'Big Steel,' one of the finest business histories ever written.

A snippet from the dust jacket: 'Warren’s subtle analysis of years of internal decision making reveals that the company’s size and clumsy hierarchical structure made it uniquely difficult to direct and manage. He profiles the chairmen who grappled with this “lumbering giant,” paying particular attention to those who long ago created its enduring corporate culture—Charles M. Schwab, Elbert H. Gary, and Myron C. Taylor.

'Warren points to the way U.S. Steel’s dominating size exposed it to public scrutiny and government oversight—a cautionary force. He analyzes the ways that labor relations affected company management and strategy. And he demonstrates how U.S. Steel suffered gradually, steadily, from its paradoxical ability to make high profits while failing to keep pace with the best practices.'

Can't blame that on illiterate hunkies, can you?

S.H. sez: 'Yes, that's precisely the kind of thing an unregulated free market suffers from.'

Well, what happened was that the public decided it no longer wanted to put up with paying for steel's externalities. In a really free market, steel would have paid its own costs.

Funny how seldom that happens in actual free markets.

Less steel would have been made, and what was made would have had to sell for more. You may or may not find that, overall, a desirable outcome. Depends, probably, on where you live.

Read 'Night Comes to the Cumberlands.'

Bret said...

erp wrote: "...putting out a brilliant idea..."

Ideas aren't generally "put out". The vast, vast majority of patentable concepts are the result of some engineer solving a problem while working on commercializing a product. The invention would've happened regardless of patent protection. Indeed, after the fact, a company manager (or possibly IP lawyer) will consider the innovations that occurred while developing the product and decide that some of them should be patented. Sometime, the IP person will determine that an innovation was already patented by someone else, in which case the engineers will have to figure out a different way to do it.

Bret said...

Harry Eagar wrote: "Less steel would have been made..."

Less steel would've been made no matter what since the world is switching to lighter/stronger composites (and aluminum). The world is using fewer buggy whips too.

Harry Eagar said...

I mean less steel in aggregate.

Over 100 years, US makers poured 100 MT/yr, for a grand total of 10 billion tons.

This is why smelting steel from ore is not done much any more. It's easier to recycle what we made already.

But if steel had had to pay its own way -- a notion that ought to appeal to free marketeers, you would think (although you'd be wrong) -- then less than 10BT would have been poured.

erp said...

Okay, I'm convinced. Patents are counterproductive, but what about copyrights? Should anyone be allowed to take all or part of your oeuvre as their own?

I wish I were born about 50 years later. It would be fun to work in high tech (if that's what it's still called). My daughter admonished me the other day that my terminology is out-of-date.

Bret said...

Certainly anyone is welcome to take any of my oeuvre as their own. The only reason I put copyright marks on my stuff is just to prevent (the admittedly very unlikely possibility of) someone else from copyrighting it and then preventing me from using it!

Please, take my music, my writing, distribute it, remix it, do whatever you want with it! I would like nothing better than to walk into a club one day and hear someone playing my music. It brings great joy to me when I hear one of my kids or friends humming one of my tunes.

There are a huge number of people who look at their creations the same way as I do.

So I'm skeptical regarding the value of copyright as well.

But, as I noted at Cafe Hayek, my only action would be to shorten the length of Intellectual Monopolies and then study the results, and if warranted, eliminate them later.

Howard said...

Now, you cannot get quality gray iron castings at any price, only Chinese crap.What if industrial consumers prefer low priced low quality iron castings in some applications and wholly different high quality materials in other applications? Why must things be static?

Well, what happened was that the public decided it no longer wanted to put up with paying for steel's externalities. In a really free market, steel would have paid its own costs.

Funny how seldom that happens in actual free markets.

If one takes a snap shot of an industrial polluter it appears that they are not incorporating the cost of such externalities. And yet the creation of many industrial enterprises was part of a process that now finds most people in the developed world with miraculously improved standards of living compared with say 200 years ago. Viewed through this lens there would appear to be huge positive externalities. We also have the wealth and technical know-how to clean up messes and design new processes which produce less pollution. As developing nations get wealthier they will do the same.

Harry Eagar said...

You don't know what you're talking about.

In this particular case, Utah Lake.

More generally, see the "Cups of Poison" chapter in Orrin Pilkey's "Useless Arithmetic."

Howard said...


I assume you're referring to the environmental problem of open pit mining and not the modeling. When I was working with people inside EPA nearly 30 years ago we were focused on helping with the promulgation of regulations for the chemical industry. It was common to discuss matters with other groups just out of interest. The people dealing with the mining industry were well aware of the serious problems from acidification and leaching. Even though there's been a serious failure to-date to address the problem more aggressively, that does not negate the more significant progress in environmental and economic matters. That's the way I see it, you obviously disagree. (see Lomborg and Goklany)

Harry Eagar said...

There hasn't been any progress at Utah Lake, nor will there be.

I am familiar with the concept of sacrificial areas. It might make sense to write off one of Minnesota's 10,000 lakes. But to write off one of the very few large lakes in the West is something else.

The Cups of Poison problem is not going to be remediated. Nobody has any idea how you would go about it.

Much cleverer to make people pay as they go. Or you can just dumbly accept whatever the market sharpers can sneak past the inspectors.

At Restating the Obvious, there's a link to a Bloomberg story which shows how unsupervised markets might kill you. I don't mean some generic you. I mean Howard.

Don't know how after-the-fact remediation would suit you then.

Susan's Husband said...

Can I trump Utah lake with the Aral Sea?

Harry Eagar said...

No. Who said communism is the remedy for capitalist atrocities?

Susan's Husband said...

It's not the Communism, but the regulation. Your claim (as best I understand it) is that regulation would have prevented a disaster like Utah Lake. What could be more regulated than the industrial use by the USSR of the Aral Sea?

Harry Eagar said...

My claim is that capitalism is a fraud when it pushes off externalities on anybody.

Which is always does. No exceptions.

Regulation to ensure that each pays his own way would be one way to attack the fraud.

What happened in the Aral Sea has nothing to do with it, since no one was concerned about externalities.

Not relevant.

And, even from your point of view, you might want to avoid the comparison, since the only conclusion that could be drawn is that capitalism works no better than communism when it comes to being honest.

Susan's Husband said...

Why weren't they concerned with externalities? That's the real issue. It's easy to say "make regulations to properly internalize externalities" but rather hard to do in practice. A system designed to deal with the world as it is will never beat a system that is wished in to existence.

P.S. I like the Aral Sea example, because the system that produced it claimed to care about externalities, while free markets openly acknowledge it as a problem, showing that free markets are in practice far more honest.

Susan's Husband said...

Hey, let's look at how regulations is made in the real world. Yeah, go unknown regulation! Because, after all, if there's an externality, the most important thing is to regulate — details are for suckers.

Harry Eagar said...

This is an imaginary proble, but suppose it to be real.

We don't have to guess, since we had an exact parallel situation just recently: CFCs.

As we know, market 'corrections' were completely incapable of addressing that problem. It required regulation.

As for the Aral Sea, the more and more I learn about Russia, the less and less I think communism was either revolutionary or even different. Russia before and since communism has not cared about externalities.

The building of Petersburg would be the example that everyone, presumably, has heard of.

Susan's Husband said...


AOG: Look at this problem.

HE: Imagine it's not a problem. See, it's not a problem. Therefore free markets are horrible.