What is the ideal size of the firm? The question has been batted around by economists for a century.
On the one hand, the answer should be obvious. The competitive market should determine results. Whether that leads to a vast array of small businesses, or gigantic businesses with massive integration, it should be dictated by profit, loss, and an active market for mergers, acquisitions, and corporate control.
The results don’t need to be gamed or dictated.
On the other hand, in this day and age, the market doesn’t always dictate. Government regulations, privileges, restrictions, and protections can cause every manner of distortion. And despite some efforts at deregulation, these have more recently been matched by new restrictions on trade and hiring.
Rise of the Indebted Giants
In light of this, consider the wave of consolidation now affecting the communications industry. The trend is striking. AT&T has been approved to buy Time Warner. Comcast has made a bid to purchase 21st Century Fox. According to The Wall Street Journal, these two giants alone “will carry a combined $350 billion of bonds and loans.” And this might just be the beginning; there are rumblings of additional mergers and actions affecting CBS, Verizon, and Viacom.Abnormal Market
In a normal market, no one should be concerned, but this is not a normal market. Communications is highly regulated at all levels, and competition is not taking its normal course. The compliance costs of regulations, taxation, licensing, issues of intellectual property, restrictions on trade, all covering hundreds of thousands of pages, and requiring the service of an army of attorneys, causes a bias in favor of big over small. The same is true in all industries.The share of Americans working for small companies fell to 27.4 percent in 2014, the most recent year for which data exists, down from 32.4 in 1989. And big companies have grown in relation. Today, companies with at least 10,000 workers employ more people than companies with fewer than 50 workers.
Market economists have always believed that bigness deserves a defense when the results are driven by market considerations. It is not up to the government to decide, which is why Leonhardt’s conclusion is the wrong one. “A government that wanted to reduce the power of big business could do so,“ he writes. ”Here’s hoping we get such a government sometime soon.”
What Leonhardt suggests is that the very government that is gaming the system in a way that promotes bigness should reverse course and do the opposite: disallow mergers, break up companies, and regulate firm size. This is pointless.
If we are concerned about the rise of the ginormous corporation—and perhaps we should be—why not start with lowering barriers to entry, removing regulations, cutting more taxes, and blasting away expensive mandates and litigation landmines? If we work toward a truly laissez-faire environment for business, we could let the market discover the right combination of big, medium, and small that serves consumers best.
Piling interventions upon interventions takes us in exactly the wrong direction.
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