What to do with big business

Picking Losers says "disintegrate it".

Comments

[per]

not sure if this is a joke ?

as picking losers points out, the bigger companies frequently gain profit by being bigger, for various reasons. Making the companies smaller may just make them more likely to fail.

there are several industries where the government operates a massive cost of entry, e.g. safety testing/research in pharma. If you are not big enough to sustain a one billion £ loss without blinking, you are at a competitive disadvantage.

per

[Bishop Hill]

That's an argument against government operating a massive cost of entry isn't it?

[per]

well, I am sympathetic. An example of massive cost of entry is the new REACH legislation, which will require assorted chemical tests for all sorts of chemicals in europe, thereby enforcing a substantial cost of entry which will militate against the use of many chemicals in any business setting.

But the bigger point is that larger scale can give increased profit or resilience. For pharma, irrespective of safety testing, they still have to spend hundreds of millions just to get a product that works; and sometimes, the new drug candidate will fail, resulting in a write-off of hundreds of millions. Scale insulates against this.

it strikes me that there could be several reasons whereby size can be a benefit, and I am no economist.

per

[Bishop Hill]

There are economies of scale, for sure, but there are also diseconomies of scale, so you can't say "the bigger the better". And obviously, if companies become too big to fail then there's a problem. We need businesses to fail, so that the badly run ones and the outdated ones are weeded out and recycled or closed.

Big pharma is a case in point. The sort of giantism that has happened in that industry is a response to the overregulation.

[Bruno Prior]

Hi BH. Thanks for linking to this. Been away for a bit, so only just seen your link.

My view on this is strongly influenced by 20 years of experience in the energy industry. The extent of malevolent, rent-seeking influence by the Big Six on government policy is truly shocking.

This is one of only two areas (of which I am aware) with which I disagree with Ludwig von Mises. He was "intensely relaxed", as Peter Mandelson would put it, about monopolies and oligopolies, believing that inefficient monopolies could only be maintained by government intervention, and that the solution therefore was to prevent government intervention, not market-dominance. His views long pre-dated the development of public-choice theories and exploration of network effects. I wonder if he would be so sanguine nowadays.

The extent of the coincidence of public-choice interests between government and the corporates (and indeed, many economists) has been brutally exposed to public view recently, and it's not a pretty sight. It may be true, in an ideal world, that all we need for efficient competition is an absence of intervention (although that is somewhat simplistic, given the importance of institutions in the creation and behaviour of markets), but we aren't likely to reach that point while government is so influenced by the corporates, and we aren't likely to reduce the influence of the corporates while they maintain their dominant positions. Indeed, we have seen how the Government's absurd response to a crisis exacerbated by the existence of banks "too big to fail" has been to override competition policy and allow the creation of a government-backed behemoth (Lloyds Group) with an even larger share of the market.

Notice how quickly we have moved away from the views in the early days after the nationalisation of Northern Rock. Then, the great concern was that a nationalised bank would have an unfair advantage, in terms of perceptions of security, over the others, and rules were carefully implemented to try to prevent NR from taking advantage. Indeed, it was said that European competition rules required such efforts. Even so, there was no way of hiding this advantage, so NR had the great benefit of being obliged to offer worse terms than its competitors and yet being inundated by demand. Now, the Government is using its influence on NR, RBS and Lloyds to force them to expand their lending on terms that more prudent banks would avoid, which will really help those non-nationalized banks to stay afloat and create a more realistic market. This is not the triumph of efficiencies of scale.

In the early 80s, it was necessary to break the dominance of the unions. Privatisation was a key part of that programme. One could make various theoretical objections to it, and certainly not all the privatisations created desirable market structures. But you can't make an omelette without breaking eggs, and it is likely that the privatisation programme, for all its faults, was the least bad way of creating the necessary "rupture" (as Sarkozy would put it) with the past.

I believe that the equivalent challenge for the next decades will be to break the dominance of the corporates. For all that one might carp that large corporations may theoretically be more efficient and might theoretically not follow their public-choice interests by trying to influence government policy, in practice, disintegration is the only way to break their malignant influence on policy.

[Bruno Prior]

Per,

Do you think recent experience in the financial services sector substantiates your view that big companies are more efficient? As the Bish says, scale can cut both ways. But in terms of influence and public-choice interests, it only cuts one way.

[per]

i read your comments with interest.

it is without doubt that size, and monopoly, can have malign effects. Large interests may unduly influence government, which can then create regulation, rules, etc., that are in the interests of the large corporate interests.

Though I note in passing that REACH is a legislation brought in by government against massive industrial opposition, and which will impose massive barriers of entry for anyone using chemicals. This is in the interest of big (vs small) industry, but it is an example of a story where the government acts for its own reasons, and the regulations they impose disproportionately penalise smaller companies.

I cannot comment sensibly on the financial industry, as I do not know enough about it. I also note that my previous comments were not necessarily about efficiency; I was merely making the point that small companies cannot write off hundreds of millions of pounds of development costs, whereas big companies can. Efficiency is another area, and I dare say that there is some room for discussion of the area !

cheers
per